Tracy Isaac, Business Development Manager at Wesleyan, talks about pension shortfalls and offers advice on how teachers can prepare for retirement.
You don’t have to be on the verge of retirement to start planning for it. In fact, the sooner you familiarise yourself with your options, the more relaxed you’ll feel about the whole process. And hopefully you’ll be better placed to make the right decisions about an important phase in your life.
It is a complex issue, so to try to help avoid confusion, here we look at what you need to consider ensuring you’re not left short in retirement.
Until April 2016 the Teachers’ Pension Scheme (TPS) and Local Government Pension Scheme (LGPS) automatically contracted members out of the Additional State Pension – allowing both employer and employee to pay lower national insurance contributions (NICs). The State Pension and Additional State Pension have now been replaced by the new flat rate State Pension.
Only those with 35 years of qualifying NICs will be entitled to the full flat rate pension (currently £164.35 per week). You will need to make sure you know whether you qualify so that you can make accurate calculations about your retirement income. If you have been ‘contracted out’, this will also be taken into account when the rate is calculated.
Someone who was contracted out will still have received qualifying years of NICs for each of the years they were earning. However, as they have paid a reduced rate of NICs, this will be taken into account when working out their new single tier pension starting amount.
This is why there can be some confusion. It can look as if you are not receiving the ‘full’ state pension, but in practice the ‘missing’ amount is made up in the benefits from your contracted out pension. This is known as COPE (Contracted Out Pension Equivalent), and when added to your reduced starting amount of state pension, it is broadly equivalent to the full starting amount.
It is important to ensure you have amassed enough qualifying years. If you are unsure, you can check your National Insurance record at www.gov.uk/check-national-insurance-record to see if there are any gaps. You may then be able to apply for credits to fill these gaps.
If it looks like you won’t have the required 35 qualifying years by the time you retire, don’t worry, there are still steps you can take.
Depending when the gap occurred it may be possible for you to make voluntary NI contributions to fill gaps in your National Insurance record. An additional year’s NI contribution can be bought for roughly £760, which could increase an annual pension income by more than £245 a year. Over the course of 20 years, this could be worth as much as £4,900.
Buying five year’s contributions for a little less than £4,000 could potentially benefit a retiree with an additional £24,500 of pension income over 20 years. However, additional contributions can’t be made if you have achieved 35 years’ service or if you are on track to reach this number of years.
While the initial cost may put some people off, in the long term it can help you achieve your retirement goal, and is still good value when compared to buying a private pension to help you close the gap.
On average, teachers think they need an income of £25,056* a year to live comfortably, but government figures show the average income of all pensioners is only £15,964** a year. But addressing your pension shortfall early can help to close this gap.
As we continue to live longer, it’s important that the money we have lasts us. Many people are now living for 30 years or more after retiring, therefore it’s vital that your money and assets can last as long as you do.
While monthly expenditures tend to decrease during retirement – mortgages are usually paid off and children have normally left home – it’s important to factor in that private care may be needed further down the line. As older generations live longer, many retired people are also finding they need to contribute towards the care costs of their parents.
If you’re unsure, get advice
State pensions can be confusing, and any changes to the system only adds to their complexity.
To make sure teachers are well informed about their retirement future, Wesleyan is holding seminars across the UK, where our Wesleyan Financial Services Consultants will be on hand to explain the changes, answer questions, and offer advice.
Speaking to a Financial Consultant whose expertise lies within the teaching profession will ensure that you can make the right choices when it comes to retirement, maximising your assets and making sure that you can live comfortably.
* Research based on a survey of 101 teachers, by Censuswide on behalf of Wesleyan, January 2017.
** Figure from Department of Work & Pensions Pensioners’ Incomes Series, June 2016.
Wesleyan Financial Services provides specialist financial advice to teachers, doctors, dentists and lawyers.
For more information about financial advice, speak to a Financial Consultant go to www.wesleyan.co.uk or call 0800 092 1990.