The
following advice notes are likely/will change from 1 April 2007 due
to changes in Teaches Pension Scheme. Members should therefore bear
this in mind when referring to these advice notes.
Personal
Pension Plan - Don't do it
Q. I've been told that the Teachers' Superannuation Scheme is not
a very good one and I would be better with a Personal Pension Plan.
What do you think?
A. Who told you? Did they give reasons? Did they know much about the
Teachers' Scheme? Or could it be that they were just trying to sell
you a personal plan for the commission.
Q. Well.... anyway they said
the benefits were not good.
A. What benefits did their scheme offer? Were they guaranteed? Did
you know that if a teacher has service from age 20 to 60 the retirement
benefits are the maximum that the Inland Revenue allows. Q. But most teachers don't teach for 40 years and this person said
that a personal pension plan could give me full benefits even with
much less service.
A. Yes it might, and there again it might not. Your benefits would
depend basically on three things - how much you have contributed, the
company's fund performance, and on annuity rates at the date of retirement.
Q. But I've seen the figures they project. Huge sums compared to a
teacher's salary.
A. Compared to the salary now - not your salary by the time you retire
- and haven't you read the small print as well? All advertisements
and illustrations now remind you that unit values can go down as well
as up, or that terminal bonuses are not guaranteed. "Past performance
is not a guide to future performance". Did you read that bit?
Q. But the teachers' scheme can't offer firmer guarantees.
A. That's the whole point. It does. For every year of service you will
get 3/80 of your final salary in lump sum and 1/80 in pension. The
return is guaranteed in relation to your final earnings.
Q. But what if I don't have full service?
A. If you want to make up for this the scheme allows you to purchase
added years of service, or pay additional voluntary contributions
which would provide additional pension on retirement.
Q. Well he did tell me one thing the personal pension plan can do
that the Teachers' Scheme can't. If I take it out I can get my pension
on voluntary retirement at age 55. In the Teachers' Scheme I could
only do that with my employer's permission or if I was ill.
A. True. But what level of income will you have? These projections
of vast cash sums are all very well, but have you enquired about the
cost of buying pension with them at the age of 55? Even more importantly,
have you considered what the pension will be worth in real terms at
age 65? 75?
Q. That's taken care
of. My pension can be arranged to increase by 5% every year.
A. Fine. How much extra does that cost? What happens if inflation is
much above 5%. The Teachers' Scheme pension is automatically increased
every year by the annual increase in the cost of living. Can our salesman
guarantee that?
Q. I don't think so, but 5% is quite reasonable.
A. At the time of writing inflation is just around 3%. Interest rates
on investment are also low, but have you looked at any earlier periods?
From 1970 to 1980 the total increase in the RPI was 247%. That is
roughly equivalent to ten years of equal inflation at 13.2% per year.
Q. So the salesman is all wrong and I couldn't possibly do better
with him?
A. No. It is possible that a contribution rate lower than the teachers'
scheme, or an equal contribution over a shorter period could produce
maximum benefits at retirement, if you were fortunate. If inflation
remained low you could also, if you had been fortunate, maintain an
acceptable pension level. It is the two guarantees in the Teachers'
Scheme that cannot be matched - the guaranteed return in terms of final
salary and the guarantee of index- linking which we believe you simply
cannot afford to throw away. We have consulted independent advisers
and leading Life Offices. None claim to be able to match these guarantees.
Q. So why should this salesman tell me differently?
A. Why is he so keen to sell a plan to you? Is it for your benefit,
or for his commission.
Q. He also mentioned poor death benefits. I suppose he is wrong there
as well.
A. No, on this one he is correct in that the death benefits are less
than the maximum allowed by Inland Revenue. We hope this can be improved
eventually but in the meantime you can improve benefits to the maximum
through AVC scheme. In any case, for anyone with dependants we would
always advocate additional life insurance cover. Incapacity benefits
also need improving but it is still immeasurably better to remain within
the Scheme and make additional health insurance arrangements than to
opt out just for this reason.
Q. To sum up then - you are telling me that no teacher should ever
opt out?
A. Not quite. What we are saying is that the Association has not yet
come across any special set of circumstances in which we could suggest
that an individual should opt out, nor have our financial advisers.
Don't forget. It is the Association's duty to advise its members in
their best interests, not to sell the Teachers' Superannuation Scheme.
If we do come across particular circumstances or a particular pension
plan that is better we will be the first to publicise it. In the meantime
we can only reiterate our earlier advice.
DON'T GAMBLE WITH YOUR PENSION !
If you have any questions or require clarification on any matter please
contact the Association in writing at the address below.
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