Pennies in the Pension Pot

Despite the caricature often levelled at teachers – 10 weeks holiday a year, finish work at three – they often really do have plenty to complain about, such as 60 hour weeks, interminable paperwork, dealing with other people’s children, and so on.

Not least of their problems is a perpetually changing pension scheme. No matter what you think of the continued existence (barely) of ‘gold plated’ final salary pension schemes in the public sector, having the rug pulled from under a key plank of your career choice’s remuneration scheme is just cause for complaint. So, what do teachers need to know about retirement saving? What state is their public sector pension in? Should they take action to supplement it? If so, what?

Traditionally, public sector pensions have been final salary Defined Benefit (DB) schemes that pay a proportion of the salary you were on before you retired. DB schemes have all but disappeared in the private sector, but the public sector held on for much longer, hence the oft-repeated ‘gold plated pension’ tag.

Under Coalition reforms – due to come into force in April 2015 – most final salary schemes have been eradicated in the public sector, including for teachers. Anyone who turned 50 before April 2012 is still eligible, but for those shorter in the tooth, their pensions have switched to a career average pension. Under the new rules, teachers still receive a pension based on their salary, but on their average earnings over their entire career, rather than what they were on before retiring.

As a 2013 Pensions Policy Institute (PPI) report found, that means public sector workers end up with a pension worth up to a third less than under previous rules. On top of that, the retirement age, previously set at 60, is being brought into line with state pension age, meaning teachers will have to work at least until the age of 67 – more likely 70 for those starting out now.

The deal is still more generous than those in the private sector enjoy, but as far as working harder, for longer, for less goes, it’s quite a jump. And when the generous pension is one of the key attractions to a career in the public sector, it’s not hard to understand why teachers feel cheated.

Estimates for how much you’ll need in retirement vary. According to Which? you’d need a pension pot of around £300,000 to replicate the average British salary of £26,000 per annum. However, as they point out, you’re unlikely to need that much money in retirement. That said, a major pensions and investment company’s retirement calculator estimates you need a pot of £340,000 for a ‘basic cost of living’ of £12,399 p/a. Advice firm Liberty SIPP estimates you need £220,000 for a minimum wage salary of £12,115 p/a. Predicting the future has never been easy.

According to the NUT, under the career average scheme, if you have an average salary of £30,000 and 20 years of reckonable service you’ll receive an annual retirement income of £10,000. Given that this example doesn’t appear to include the state pension and/or other retirement benefits, that should work out to a comparatively good standard of living in retirement.

However, it’s still not a lot, and if you have significantly less than those 20 years of reckonable service, you’ll obviously receive significantly less. And with continual pressure to reduce the public pensions bill, it’s not out of the question that future rule changes will leave you worse off – not to mention the fallibility of projecting so far in the future (demonstrable by the wildly varying pension pot estimates). All of which suggests that topping up your teachers’ pension is a good idea.

If you decide you do want to top up your standard pension, what do you do? Additional Voluntary Contributions (AVC) are available as part of the teachers’ pension scheme. The scheme, run by private provider Prudential, is essentially no different from contributing to a defined contribution (DC) pension elsewhere. Every benefit the Prudential lists is common to all private pension schemes.

This means that although there’s nothing wrong with choosing AVC for the sake of convenience, it’s not necessarily your best option. If you’re willing to put a bit more work in, you may get a better deal elsewhere. Also worth considering is that putting money outside of a dedicated teacher scheme puts you one more step further from government rule changes.

Putting aside the fairness or not of the pension reforms, the key points for teachers are: that you will have to work longer, for less than your predecessors; that topping up your pension is a good idea; and that the rules can and do change – and never in your favour.

Of course, all these points apply to non‑teachers as well – both public and private sector. So for now, you should count yourself lucky that you have a career average pension; it may not be as good as the final salary pension your boss is getting, but it’s one better than the straightforward DC scheme most of your friends have.