Stephen Casey seeks to clarify a common misunderstanding by members about the teachers’ pensions final salary scheme and the career average revalued earnings (CARE) scheme.

Pension myth

A member recently asked me, “Can I confirm that all my contributions now go into the career average scheme, and I am no longer making any contributions to the 80ths final salary scheme?”

There’s a widespread misconception that on 1 April 2015 the final salary pension for teachers was somehow ‘frozen’ and that when members transferred to the new career average scheme, they could forget about the final salary part of the pension. This is only partially true as there is always a link between the two schemes provided you don’t have a break in service for greater than five years.

If you are under the age of 54 years and two months (59 years and two months if you joined after 2007), you now have two teachers’ pension schemes. Your final salary scheme, which is partially frozen, and the CARE scheme, which is live. All the contributions you currently make are towards both your pensions.

Nicholas was born on 29 April 1970 and became a teacher on 1 September 1992.

He joined the final salary scheme (80ths) with a pensionable age of 60. However, on 1 April 2015 he transferred to the new CARE scheme just before turning 45. His pensionable age in the CARE scheme is the same as his state pension age, 68.

On 1 April 2015, his salary was £70,000 and he had 22 years 212 days (22.58 years) of service. While the service into the final salary scheme is frozen, the salary is not. Which means that any increase in salary will continue to see that pension increase as well.

For the following three years Nicholas has seen his salary increase by £2,000 each year and now he earns £76,000.

Calculating your pensions

Final salary scheme

Pension = service/80 x salary

Lump sum = 3 x pension

CARE scheme pension = 1/57th X annual gross salary

The CARE scheme pension also adds inflation (CPI, Consumer Price Index) + 1.6% annually. Please note: You can convert up to 25% of your CARE scheme pension into a lump sum if you wish at the rate of £1 of pension to £12 of lump sum.

On 1 April 2015, when Nicholas transferred to the new CARE scheme, his pension (all in the final salary scheme) was worth: Pension = 22.58/80 x £70,000 = £19,758 pa plus a lump sum of £59,275.

On 1 April 2018 his final salary and CARE schemes will have both accrued more pension. His salary has had an increase, and this will affect the final salary scheme, and he will also have accrued three years’ worth of CARE pension plus CPI +1.6% annually. His service in the final salary scheme remains the same (frozen for evermore) while his salary has risen, his pension is worked out as follows:

Final salary pension = 22.58/80 X £76,000 = £21,451 pa plus a lump sum of £64,353

CARE pension

2015-16 = 1/57 x £70,000 = £1,228 pa + CPI + 1.6% = £1,339 pa

2016-17 = 1/57 x £72,000 = £1,263 pa + CPI + 1.6% = £1,355 pa

2017-18 = 1/57 x £74,000 = £1,298 pa + CPI + 1.6% = £1,358 pa

Total = £4,052 pa

The CARE calculations have taken into account CPI + 1.6%. CPI for the last three years has been 0% (1.6% added), 1% (2.6% added) and 3% (4.6% added).

Nicholas’ pension is currently worth:

Final salary = £21,451 pa plus a lump sum of £64,353 CARE = £4,052 pa

Total = £25,503 pa plus a lump sum of £64,353.

So, while your contributions are for the CARE scheme, your pay rises do have an impact on both schemes.

When can I retire?

Unfortunately, the rules state that if you wish to retire then you have to take both pensions at the same time, even though they have different pensionable ages.

For Nicholas, both pensions become fully payable at the age of 68. There are many flexible ways of retirement, including early retirement or phased retirement, although the issue of early retirement has been of some concern to members. For example, retiring at 57 would mean three years of actuarial reduction to the final salary pension but eleven years of reduction to the CARE pension, currently approximately 12% and 50% respectively.

The Teachers’ Pensions website has a useful guide (https://tinyurl.com/yd4bo933) about the conditions needed for accessing benefits under the different arrangements and includes common scenarios for retirement.

For more advice call the ASCL Hotline on 0116 299 1122 or contact our partner, Lighthouse Financial Advice, via www.lighthousegroup.plc.uk/affinity/ascl

Stephen Casey
ASCL Pensions Specialist
@ASCL_UK

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