- Worried About the Drop in Income After Leaving Employment?
- Link 2
Drop in Income Worries?
This section is a link to a post on David Fountain’s website. The content of this video relates to members taking Early Retirement or Normal Age Retirement who are leaving teaching and are concerned about the drop in their income.
The post contains a link to a 10-minute video in which David explains how he thinks about the drop in income facing members who claim their pension early and may not have other sources of income.
The video uses an example of a member in the FS80th/NPA60 sub-scheme who is considering retiring at 55 and is worried about the drop in their income. https://dfountain.co.uk/poor-pensioners/
NOTE 1: The principles and concepts discussed in this video are similar for members in the FS60th/NPA65 sub-scheme and the CA sub-scheme.
NOTE 2: Actuarial Reduction tables for Early Retirement are revised every 4 years. The 81.1% David mentions in this video was revised in 2024 and is now 82.7%. It may change in 2027. The principles described in the video remain the same.
Key Features of Early Retirement
TAKING YOUR PENSION BEFORE NPA = EARLY RETIREMENT
- * ABATEMENT: Abatement does NOT apply to Early Retirement.
- Abatement is discussed in a later section of this guide called ‘How ABATEMENT is Related to Early Retirement’.
- * CONDITIONS: You have to be under the NPA of your scheme(s)
- * PERMISSION: If you intend to continue in your job after claiming your pension, you must have a break in contract with at least one full day of ‘unemployment’ on which you claim for your pension to start and a new contract (which could be on the same terms as your current contract).
The day of ‘unemployment’ is discussed in a later section of this guide called ‘The One Day Rule – The Break in Employment Required For Early Retirement’.
It is at employer’s discretion to grant you a break in contract. Your employer MUST agree to enable you to take Early Retirement.
This means you need a co-operative and trusting relationship with your school and for you to be as certain as possible that the employer will honour the agreement.
NOTE 1: This point, obviously, only applies if you are still working and want to continue working for your current employer.
NOTE 2: Be aware that the one-day break in contract is sufficient for TP purposes but some MATs/ LAs have local policies that insist on a longer contract. Check with your LA/ MAT.
NOTE 3: Your employer can withhold their permission for you to take Early Retirement for up to six months whilst you remain in their employment. Once you are out of contract (ie left your job), your employer has no power over when you can take Early Retirement.
NOTE 4: If you apply for Early Retirement whilst still working in a TP-eligible job, your pension will start on the first day after you have left TP-eligible employment, as long as you are over the minimum pension age on your first day of unemployment.
NOTE 5: If you want to pick the date your pension starts, you can only apply for your pension after you leave TP-eligible employment and you are obliged to ask for it to start at least 6 weeks after you have submitted your claim.
- * OBLIGED TO CLAIM ALL PENSIONS: You are obliged to take ALL your pensions (FS80th/NPA60 AND/OR FS60th/NPA65 AND CA) when taking Early Retirement.
- * ACTUARIAL REDUCTION: Each of your pensions that you have taken early incurs an actuarial reduction for being taken early. Actuarial reductions are designed, over an average life expectancy, to be fair rather than punitive as you will be receiving less pension for but for more years.
- * AUTOMATIC LUMP SUM: Only the FS80th/NPA60 has an automatic lump sum (3 x annual pension). The FS60th/NPA65 and Career Average scheme do NOT have automatic lump sums.
- * OPTIONAL LUMP SUM: In ALL TP schemes, you can opt for an optional lump sum. Each £1 reduction in your index-linked annual pension is exchanged for £12 in one-off, upfront lump sum. This facility to take an optional lump sum also applies for the FS80th/NPA60 that already includes an automatic lump sum.
- * ACCRUING MORE PENSION: In order for pension contributions after Early Retirement to qualify as CA, you must complete at least 12 FULL months of further employment according to the terms of your contract. If you do less than 12 FULL months, your pension contributions will be allocated to a less favourable ‘Short Service Annuity’. This minimum further service requirement is the same as for Normal Age Retirement (but can be avoided by taking Phased Retirement).
More information: https://www.teacherspensions.co.uk/members/planning-retirement/types-of-retirement/early-retirement.aspx
The next sections in this guide will be links to David Fountain’s videos, website posts and spreadsheets that relate to Early Retirement
What Does a ‘20% Actuarial Reduction’ Mean For You In Practice?
The purpose of the 10-minute video linked in David’s post is to explore the mathematical effect of a 55-year-old member in the FS80th/NPA60 sub-scheme who takes their pension five years before their NPA of 60. https://dfountain.co.uk/lose-20-not-true/
NOTE: Similar principles and concepts apply to those who are in the FS60th/NPA65 and the Career Average sub-schemes.
NOTE: The reduction factors referred to in the video are from before 2023, these factors are reviewed every 4 years and in 2024 there was slight improvement in the factors for the schemes.
How You Can Calculate Your Own Figures For Early Retirement -AAB Sheet
- If you want to calculate how much TP you would get if you stopped contributing to TP now, David Fountain’s spreadsheet (linked below) will be of use to you.
- The spreadsheet works best for people who have already been teaching for a long time and are closer to retirement.
- This sheet tells you, in TODAY’S MONEY, what amount of ‘stuff’ you be able to buy with your actuarially reduced pension from the time you claim it. This is because your TP is ‘index-linked’, which means it rises in line with inflation each year and, in theory, maintains your ‘purchasing power’ each year
- Put another way, whatever ‘stuff’ you can buy with the numbers on the spreadsheet, you should, in theory, be able to buy the same amount of ‘stuff’ each year from whatever retirement age you put into cells B7 and B8 of the spreadsheet.
- i) Make a copy of the googledocs sheet: FILE -> MAKE A COPY
- ii) Fill in the white cells in column B using the figures from page 1 of your TP Benefit Statement.
- iii) The percentages in the white cells are set to the maximum percentage you can take as an ‘optional lump sum’ in each sub-scheme. You can change the optional lump sum percentage between 0% (no optional lump sum) and the default on the sheet (maximum optional lump sum).
- https://docs.google.com/…/1MmQ1h1AwCoC5IggRdVai…/edit…
2) If you still have years left to work (and accrue more TP) and would like to calculate your predicted pension, log into your MPO (My Pension Online) through the TP website.
- You will see a range of calculators and modellers.
- Read the list of things it can do and its restrictions.
- We suggest you set the inflation slider to zero.
How ABATEMENT is Related to Early Retirement
As with most financial decisions, there are trade-offs to be made that will make a particular course of action more suitable for some people than for others.
For members with FS80th/NPA60 and CA pension, the main trade-off is that Early Retirement avoids ABATEMENT but incurs an ACTUARIAL REDUCTION.
Therefore, Early Retirement MAY be an appealing course of action for members who:
- are in the FS80th/NPA60 sub-scheme AND
- are still under their NPA of 60 AND
- are planning to continue working full-time (or almost full-time) in a TP-eligible job for at least one FULL year after claiming Early Retirement (to enable them to accrue more CA pension) AND
- have a relatively small CA account compared to their FS80th/NPA60 account.
In this 10-minute video, David Fountain explains the concept of abatement and how it affects the TP Final Salary sub-schemes directly.
https://www.youtube.com/watch?v=ZB5KPY-nnQw
The One Day Rule-The Break in Employment Required for Early Retirement
In order to take Early Retirement, the TP member must be ‘unemployed’ on the day the pension starts.
For TP purposes, this can be achieved through a one (or more) full day’s break in contract. To grant a break in contract is at the employer’s discretion – it is not an entitlement.
Some employers (LAs and MATs) struggle with the concepts involved as, sometimes, the TP rules around Early Retirement are conflated with other aspects of employment law.
In addition, some employers have their own local policies that over-ride that which is required by TP for the purposes of Early Retirement. You must check your employer’s policies as they may have policies in place that affect some of your other employment rights related to continuity of service (eg sickness and redundancy). Tread carefully and read any new contracts carefully.
David Fountain explains the ‘One Day Rule’ from TP’s perspective here:https://dfountain.co.uk/one-day-rule/
‘Entitlement Day’ – How to Pick the Optimal Day to Start Your Pension
When taking EARLY RETIREMENT, can you pick the date to start your pension? IT DEPENDS
If so, is there an optimal date to maximise your pension? YES
***SCENARIO A: You are over 55 and under NPA AND have submitted your claim for Early Retirement whilst still working in a TP-eligible job. The pension will automatically start on the first day after you leave TP-eligible employment . You CANNOT choose your own date.
i) If you are leaving TP-eligible employment altogether, your pension will start on the day after you leave.
ii) If you are taking a short break* in order to take Early Retirement, your pension will start on the first day of your break. In this case, the first day of your break may be the only day of your break.
NOTE: a one day break is the requirement to comply with TP regulations – the break only needs to be one day. However, some employers and employees may request, or insist, on a longer break. ***
SCENARIO B: You are over 55 but will leave your TP-eligible employment whilst still under NPA. You want your pension to start a couple of months later than the first day after you leave employment – you CAN pick your own date.
OR you have already left TP eligible employment and want to choose a date to claim Early Retirement – you CAN pick your own date.
This link to a post on David Fountain’s website contains a 5-minute video that guides you through picking the date to start your pension: https://dfountain.co.uk/pick-the-right-day/
What to Do If You Have Decided to Take Early Retirement (Steps)
STEPS TO TAKE, AND GUIDANCE NOTES, FOR THOSE WHO HAVE DECIDED TO TAKE EARLY RETIREMENT
1) Set the date when you will claim your pension to start
You must be at least 55 (for now and until the DfE provide clarity for those who turn 55 on or after 6th April 2028) on the date you claim your pension to start AND on the day you claim your Early Retirement pension (aka AAB Award) to start, you have to be either:
i) ‘unemployed’ ie taking a break of at least one full day between teaching contracts (see NOTE 1) OR
ii) ‘not in a ‘TP-eligible job’ – ie no longer teaching (see NOTE 2)
Without knowing that ‘start’ date, you cannot proceed any further.
NOTE 1: If you are looking to have a single day’s break and return to the same job for example, then you will need to negotiate this with your employer. The granting of the day’s break is at the school’s discretion – it is not an entitlement and they do not have to grant it. In addition, you must be sure that the employer will honour any agreement and be clear about any changes in your new terms and conditions, especially those aspects that relate to continuity of service eg sickness and redundancy. This is best achieved by the employer providing you with a new written contract.
NOTE 2: If you leave teaching before applying for Early Retirement or you want to choose the date that the pension starts, then you have to pick a date for your pension to start that is at least 6 weeks after you leave TP-eligible employment and submit your application form.
For example: 31.08.24 – Leave employment -> 05.09.24 – Submit claim to TP requesting pension to start 3rd November -> 03.11.24 – pension starts (or will be backdated to this date, if TP processing takes longer)
NOTE 3: Because Early Retirement involves taking a break in employment, you do NOT need to opt out of TP for a month, like you do with Normal Age retirement.
***2) Submit your claim form to TP
Up to six months before your chosen start date, complete the ‘Application for Early Retirement (Actuarially Adjusted Benefits)’ form (see NOTE 4):
https://www.teacherspensions.co.uk/members/resources/forms/applying-for-retirement.aspx
NOTE 4: Since you are taking Early Retirement, you are obliged to take ALL your TP scheme pensions, along with the actuarial reductions that taking Early Retirement will incur.
***
3) RSS and Optional Lump Sum Choices
Wait for TP to send you your RSS (Remediable Service Statement which covers the remedy period 01.04.2015 – 31.03.2022) which lays out the choices for you in regard to the remedy period. (see NOTES 5 – 7)
NOTE 5: If you have ‘transitional protection’, then TP SHOULD give you the choice at this point as to which scheme your service in the seven years from 1 April 2015 to 31 March 2022 gets counted in. To help with this, they send you the RSS that shows how much you will get for each choice. You pick the one that is best for you and return the form. In some cases, TP are not sending out the RSS but are just giving you the final salary option for the moment. You will still get the choice but it might not be until April 2025.
NOTE 6: If you do not have ‘transitional protection’, or they are not ready to give you your RSS, then your pension will be based on your service as it is currently shown on your statement. If you do have ‘transitional protection’ and they are just not ready at this point you will be given the pension as it stands and then, later, given your RSS and allowed to choose then.
NOTE 7: You will also be asked if you want to “give up” some of your annual, indexed-linked pension in return for an optional, one-off, upfront lump sum payment. For every £1 of annual pension you sell, TP will give you £12 in lump sum.
See David Fountain’s video: ‘selling the Golden Goose’ in which he lays out why, in his personal opinion, the £1:£12 exchange rate is poor value in a purely financial and mathematical sense. However, for some people in certain circumstances, taking the optional lump sum may be a sensible option. Seek financial advice and/ or do further research if you are unsure about whether to take an optional lump sum for your personal circumstances.
https://www.youtube.com/watch?v=wiskpdazlpM
If you decide to take an optional lump sum, then you can pick an amount from each scheme to ‘sell’. There is a maximum you are allowed to do this with: up to just over 19% of the FS80th/NPA60 final salary pension and just under 36% of the FS60th/NPA65 and Career Average schemes.
***4) Complete and Return Your RSS and Optional Lump Sum Choices
Subject to getting the RSS, reply telling them which of the options you want and any conversion of the pension to a lump sum.
***
5) Wait..and Wait…and Wait…and Worry!
Sit and wait and panic at the lack of communication from TP. Your task tracker may or may not change. You may not receive confirmed figures until after you have started receiving the money in your bank!
***
6) Retirement Day
On the day of retirement, all being well, TP pay the lump sum. Then monthly, on the day before your birth ‘day’, they start paying the monthly pension amounts. Your first pension payment may not be the full month, depending on the date of your retirement and your birth ‘day’.