Early Buy Out

[@benratcliff1022]

Hi David, Firstly, thanks for your efforts to help teachers get to grips with trying to understand teachers pensions. They really are complex. We've been looking in to the Early Buy Out for a few weeks and now need to make a decision before the deadline. I had a couple of questions, would be good if possible to get your thoughts on them. I read in one of the Government Actuary Dept documents on the 'TPS, Career average, Election to buy out, Factors and guidance document (11 Sept 2019)' it mentioned (section 2.9) if you are out of service for 5 years then they revoke the buy-out election. Have you come across this? It sounds like that in that scenario you lose the buy out you've part paid for; which could affect those wanting to stop teaching early but not start claiming the pension. I've been trying to do our own calculation for 2Y xM, but can't seem to find the TPS published table that shows your AAB data. Would you be able to point me in the direction of the source of your data, so I can get the whole table please? Thanks again and I'm sure a lot of people appreciate the efforts you put in to help.

[@dfountain]

Yes, I have seen this and is not as severe as it sounds. "Revoking" the buy out election simply means that you get to KEEP the benefit but only for the amounts you added to the pension whilst you were paying for the buy out. Which really does make sense, you get what you paid for. It is SUBSEQUENT service, any service after the buy out is revoked that won't get the benefit. Though I was under the impression that you could, upon re-entering more than 5 years later, apply for Buy Out again from that point going forward. You can also VOLUNTARILY "revoke" the buy out election and stop paying for it. In this circumstance you cannot re-start it later. My data for the reduction factors comes from this page, recently updated with new (and better) factors: www.teacherspensions.co.uk/members/resources/factors.aspx

[@graemehatton5123]

Thanks for this David. I recently opted in to AAB and am surprised to see that I am paying 1.9% of pensionable earnings. (So over £1000 a year). I am 57 and opted for 2 years buyout. Can you tell me why the percentage is double that in the table you showed. Or is this simply because it’s for 2 rather than one year?

[@dfountain]

Yes, exactly that. You pay double and get double the benefit.

[@graemehatton5123]

@@dfountain Apologies one last question! So that figure of £15.86 (or what ever it will be for me) is added back into my pension (both years) for each month I’ve had the extra money deducted in AAB?

[@dfountain]

@@graemehatton5123 Twice that as you are buying two years, but yes.

[@juliewatts8391]

Hi David, thank you so much for all your work in helping us begin to understand the complexities of the TP. You're making it gradually less daunting to tackle all of this for so many of us :) I am currently thinking about going for the early buy out. I am 63 at the end of this year, and was going to take phased retirement. However, I have been advised to drop my hours instead, which I intend to do by 11.1 per week, as I've only got 2.5 years before 65. Do you think the early buy out would still be worth it because of this? Also, I hope you don't mind me also asking again, as you have helped me understand this a bit better before, but I now have a dilemma about taking a break for a month now because of my decision to go part time. You kindly showed me I didn't have to worry before, but now, I don't know if I should take a break for a month before I drop my hours, so 'locking in' what I have now, or would it not make a difference? Thanks again David

[@dfountain]

Without looking in detail at your full service history this isn't one that I can help you with. My opinion on the Buy Out is that it is only "good" if you get credit for 2022-2024 without paying for it and "average" if not.

[@contactingrichard]

David Thank you for this video. As ever, it's very helpful. I would be grateful for your thoughts on the following. Aged nearly 50, I elected to be part of the Buy Out arrangements and am due to start making contribution payments for this very soon. 1. If I cancel my contribution payments in the very near future, will I still have two years (those which were backdated) of "contributions" in the scheme and maintain these until I retire, or will the backdated years be removed? 2. Is there a minimum amount of time for which contributions must be made such that the backdated years are secure? 3. Can the accrued contributions be used at an early retirement age, or does it have to be at or very near pensionable age? I hope that this above makes sense. Richard

[@dfountain]

I'm afraid there are no clear answers to this, we just don't know how they are going to process such issues. For the third point the calculations apply the Buy Out advantage no matter at what age you take it. For each "year" you have bought out your career average pension will be 3% better than it would otherwise have been.

[@tofera]

Surely this only works fully if you work to age 65 paying for the Buy Out? If you retire earlier than 65 with Buy Out then the reduction would surely be pro rata. TPS refer to it as a long term commitment.

[@dfountain]

Yes. The reduction factors are multiplied together and as such you get a proportion of the benefit if you take the pension "early". For example, someone with a SPA of 67 who has bought out 2 years would get these reductions (with and without the buy out) Age 55: 0.648 with, 0.609 without (0.039 benefit) Age 56: 0.673 with, 0.633 without (0.040 benefit) Age 57: 0.700 with, 0.658 without (0.042 benefit) Age 58: 0.729 with, 0.685 without (0.044 benefit) ...and so on up to Age 64: 0.953 with, 0.896 without (0.057 benefit) Age 65: 1.000 with, 0.940 without (0.060 benefit)

[@tofera]

Thanks for your reply. So if I’m age 50 and to buy out 2 years is whatever TPS calculate for me working to age 65 for full benefit. If I retire at 55 I have only paid 30% of the contract so I would I only get 30% of the 2% reduction I was buying so just 0.6% less actuarial reduction on the CARE scheme?

[@MS-yy2dh]

David - I called TPS and was told that if I opt for early buy out I will be required to make retrospective payments for the period from 1 April 2022 to 31 March 2024.

[@dfountain]

Please do let me know what the letter says when you do apply.

[@LeonTrodski]

Could you give some more information on this? Did they say how this would be done? Many Thanks

[@mackymac3479]

Hi, I wasn't told this when I arranged the Early Buy Out option.

[@aalvarez9809]

Hi David. Thanks for the videos. You used to have a spreadsheet that you shared that showed how long it would take to make back what you put in when buying out, but I can’t seem to find it anymore? Is this still available? Thanks

[@dfountain]

docs.google.com/spreadsheets/d/1NYTK-XSScUVn0EE95M4k1ozzumgZfEQluXOYtIbNCkw/edit?usp=sharing

[@louisecampbell1289]

If the “rumour” is not true and the last two years are to be charged retrospectively, would this be charged as a lump sum? Apologies if this is a stupid question.

[@dfountain]

No idea. And I don't think they do either...

[@louisecampbell1289]

Thank you for your reply.

[@LeonTrodski]

@@louisecampbell1289 I have recently had my letter through which states that "no arrears are due". So 2 years free it looks like!

[@louisecampbell1289]

@@LeonTrodski that is amazing. I’m still waiting for my letter.

[@PatriciaJones-ju2tm]

Hi Dave , thank you for your fantastic videos . My question - what happens if I pay the buyout but decide to retire before 65?

[@dfountain]

dfountain.co.uk/early-but-out-explained/ (See the part under "How Long You Pay For")

[@DoctorMikeReddy]

I’m a hybrid. Most of my pension is the final salary, ending at 60. If I carry on working, contributing to the career average scheme, does the final salary scheme pension increase, even though I’m not contributing to it since April 22?

[@dfountain]

The final salary scheme continues to use the salaries right through to when you finish, but this can mean the final salary pension can lose as well as gain value.

[@rosepetal45]

I'm sorry but I don't understand any of this😢. I took early retirement at 55, and I am now 60. My state pension age is 67. Am I affected by this , and if so what should I do?

[@dfountain]

​@@rosepetal45 You can ignore this one, it only applies if you were still teaching after March 2022. You may want to look at retrospective additional pension though: dfountain.co.uk/retrospective-additional-pension-purchase/

[@rosepetal45]

@@dfountain than you. Phew!

[@steallen7225]

when will 'we' know if the buy out option for the two years you mention at the end of the video is 'free'?

[@dfountain]

It will probably take many months for the dust to settle.

[@rachelbirkby8619]

Hi David, thank you so much for another invaluable, informative video. I think I've managed to grasp the main points, just wanted to sound you out.. I'm currently 55 and planning to leave teaching at 58 and a half but won't take my final salary pension til 60 and currently my career average at 67. If I buy out 2 years before the end of March is this likely to be beneficial and possibly even free (if I understand your previous video correctly?) Or is that only for people retiring before wlthe end of March? Many thanks again

[@dfountain]

If you pay for it you will get the benefit, UNLESS you leave claiming the CA pension until 67! If you don't take it at 65, having bought out 2 years, then you gain nothing from leaving it until 67

[@rachelbirkby8619]

@@dfountain oops absolutely, I've just realised that! 🤦🏼‍♀️Do I pay for my buy out in 1 lump sum or is it taken out of my monthly salary? In which case what will happen if I leave teaching early at 58? Will I need to pay the shortfall that I would have paid until claiming it at 65? Sorry for the tirade of questions BTW! Thanks again

[@delmarks6529]

Is it a 1 year cost or does it continue every year until you retire?

[@dfountain]

It continues as long as you continue to pay for it. If you stop paying then the benefit is applied only to the amounts you added to the CA pension added up until that point.

[@delmarks6529]

@@dfountain thank you!

[@nfl54]

Hi David, thanks for the videos. I am a 35 year old teacher and have been teaching for 10 years. From my understanding you mention that the longer you pay into the pension the better, as you will get your money back from an earlier age e.g 72. Is my understanding correct? Also I was wondering if I bought three years out what happened if I decided to retire before my reduced new pension age of 65 (e.g 60 years old) and stopped paying buy out. Would they recalculate how many years and months I have bought out and given me my new pension age of e.g 65 years and 11 months? This would be the age then I can take my full pension? If so how can we work out the calculation?

[@dfountain]

When you pay for a single year it gets no extra benefit from the annual increase that adds 1.6% on top of inflation. It is this extra 1.6% that gives an advantage to the early years if you carry on paying for the Buy Out over an extended period of time. However, if you did carry on paying for 10 years then you have a range of years, the one from 10 years ago getting 9 lots of this 1.6% extra, the following year only 8 lots, and so on right down to the most recent year that won't get any. This page looks at the impact on stopping, or "revoking", the Buy Out election before you retire and what happens if you take the pension "early": dfountain.co.uk/early-but-out-explained/

[@calum6590]

My teacher wife is only 34 but could easily have a NPA starting with a 7 by the time we get there. On maternity leave atm so minimal pension addee this year. Trying to make a plan so she doesn't have to work till she drops. Her pension is going to be cut so much if she wants to retire at any sort of decent age. The 37.5% death benefit seems rubbish as well. If i die tomorrow she would get 100% of my DC pension. More i look into it the worse it gets.

[@dfountain]

Don't be fooled by the maternity leave pension contributions - so long as she is receiving at least SMP then her pension gets added as though she was on her normal full amount of pay (but she is paying less since her contribution is the same percentage but of the smaller maternity leave payments). Take a look at my video on taking "early" retirement and why that isn't a punishment - but designed to give a "fair" return for the investment: kzbin.info/www/bejne/f3u9gK2eoZh5fpo The comparison with the DC scheme is trickier and at the end of a career then the DC is often favoured, but consider the current valuation. At 34 you have put in around 17 years worth of contributions. On a teacher's salary average of £40k, but with the legal minimum contribution of 8% that is often the case for DC schemes (5% employee + 3% employer) that would give a total payment into the scheme of about £54,400. If she died at that point, yes, you would get 100% of that fund. 100% of £54,400. However, in the teachers scheme if she died whilst still in the scheme you would get 3 times her full time salary, probably higher than the "average" I noted above, but say at least £120,000 if we use that figure...PLUS, you would then get 37.5% of her CA pension, PLUS that CA pension would be enhanced by adding on half of what she would have added between the date of her death and her state pension age...at 34 that would represent another 17 year's worth of pension additions. One more point about the "survivor's" pension you would receive. That 37.5% is based on the full, unreduced, amount and not any reduction that would be applied if she had taken it "early", so if she did take it at 57 and got around 64% of it for herself, you would get 37.5% when she died - that is well over half the pension she would have been drawing at 57.

[@calum6590]

This is such a good reply and really addresses a lot of my panicked points. Thank you for taking the time to do your videos and reply to comments. I will look into the areas you mention further with a new positivity 👍🏻

[@davidbell-j9q]

Hi David, big fan of you and your videos and they have benefited many of us so thanks. I will be 60 in July and retiring end of August this year. I have 28 years in teaching, about 52K salary, and have another pension with BT, will get about 6K annually. for that. I will continue to work for AQA, 2 to 4K annually, and also have been running a business which I want to expand, earning about 5K annually. This year running up to April I will have some 40% tax to pay and hoping to reduce that a lot. I think buy out seems little good to me and am considering a SIPP. Is there anything linked to the TPS that may benefit me in reducing my taxable income this financial year ? Or anything else you might suggest? I may do a bit supply or a maternity cover next year but not too much. Cheers from a fellow Dave.

[@dfountain]

Buy Out is worth a shot, the possibility of getting it applied to the amounts you have already added to the scheme seems "too good to be true" which makes it tremendous value for money, but even without that Buy Out shouldn't be a waste of money for the average person. You could apply to buy AP in the current scheme and pay for it with a lump sum, you would then need to get the full tax relief back from HMRC.

[@MichelCreber]

Hi Dave, I'm currently buying out 2 yrs - the gov website says my pension age may raise to 68 in 2028. Do you know if I will have the option to buy out the 3rd yr if that comes in ? At the moment I cannot opt for 3, seems unfair to change the goal posts half way through. Thanks, great vids and info

[@dfountain]

The State Pension age is not expected to rise to 68 until 2044.

[@andrewwhittaker7796]

I opted for the buy-out and received a letter immediately asking for the arrears?

[@dfountain]

I would love to see that letter, please email me [e-mail] I am presuming you have been in the pension scheme for a while.

[@LeonTrodski]

Hi Andrew, could you provide a bit more information on this? Were they asking for a lump sum?

[@LeonTrodski]

Dave, just wondering if you had seen a copy of the letter and had further information on this? I'm a 36 year old HoS and this would seemingly be beneficial but probably not if I have to pay back a £2.5K lump sum. Thanks@@dfountain

[@andrewwhittaker7796]

@LeonTrodski Hi, the arrears I had to cough up were because I was also making faster accrual payments. To cover the deficit, I paid a lump sum, and my work also amended my payments.

[@Solgoodman85]

Probably a stupid question, but do you make addition payments for just 1 year? Or does it come out of your pay until you retire? Also, would “years to recoup” come down by 20% if you went from 40% tax payer when paying extra down to 20% tax payer when retires? Thanks again for another great video

[@dfountain]

Every month you pay the extra ~1% and as a result the amount added to your pension in that SAME month will benefit from this cancellation of the 3% per year standard reduction. It is always more beneficial for those paying 40% income tax since your 1% will be turned into 0.6%.

[@lindaalexander2557]

Hi David, Is it possible to use the money I had saved with the teachers pension scheme for Early Buy Out. They have already had the money, so there aren't accruals.

[@dfountain]

Not sure I understand what you mean. You have to pay for EBO on top of and not instead of your normal pension contributions.

[@karlrichardson1253]

Hi David, I’m currently 31 and just shy of the 60K mark as an AHT. Would you recommend buying out the 3 year, even though I hope to go early at 60! Unsure if it would be worth it if I was going to retire early anyway as I wouldn’t be getting the full allocation of pension and will have to take a hit somewhere down the line. My state pension age is 67.

[@dfountain]

I am just not qualified as a financial adviser so cannot make those kind of recommendations. All I can do is look at the maths and show you what I have found the choice has to be your own.

[@simongriffiths12]

Hi I am 55, not teaching at the moment and only 6 years and 29days in the average salary scheme. using £28,005.00 They have used Method C ? best 365 days in last 1095 days? 60 years normal pension age . I work outside of teaching now and have another small pension can I ask about past added years , it has popped up on my pension application and I am unsure as to what it is and whether I can or should be doing it Thank you Heather x I am pretty sure that it is beneficial of me to take early pension even at reduced rate of .853 % . thank you

[@dfountain]

if you don't know what "Past Added Years" is then almost certainly you won't have any! This was a MUCH older method of adding to your pension and to enter into that arrangement you would have needed to fill out forms and work out how much extra you would have been paying to get them.

[@simongriffiths12]

@@dfountain thank you , I have watched all your videos and feel so much more informed on what to do next, really appreciate you answering , and so quickly Heather x