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Hiya Firmonkey,

Sorry it’s took me so long, to be honest finding the motivation to finish it off was the
hardest it’s a tad more than a five minute post on the message board which usually
gets me thinking “I’m working here, bugger this for a game of soldiers where’s me
cue.” And then once done I had a heck of a time trying to get it uploaded.

Anyways, the question at hand is...

Will you be better off in a personal pension/stakeholder pension as opposed to joining


the teacher’s pension scheme? Assuming your net outlay is the same either way.

First of all we have to calculate what will be invested and how much will be paid by
you. So as it stands today:

Age 32 (assuming 33 exact years till age 65)

£31,116 Salary. 5435 Tax Code. 2008~2009 Fiscal yr.

Employers costs:

£ 31,116.00 Gross salary


£ 3,283.97 Employers contracted in NI
£ 1,500.00 Employers contribution to any pension
---------------
£ 35,889.97 The cost to the employer of employing you.

£ 23,157.64 Your Nett pay after your NI and tax (£1929.80p/m)

Pension entitlement on top of the OAP = SP2 (new SERPS scheme) based on salary
of £31,000 from being contracted in. In today’s values this stands at £108 p/w
although it may be more or less depending on your earnings before now as it is
basically averaged over your working life.

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OPTION 1:
JOIN THE TEACHERS PENSION SCHEME:

£ 28,777.30 Gross salary


£ 2,121.87 Employers contracted out NI
£ 1.550.00 5% of old salary employer’s contribution to TPS
£ 1,112.10 Employer NI savings paid to TPS
£ 2,338.70 Salary sacrificed paid to TPS
--------------
£ 35,899.97 The same cost to the employer of employing you.

The £5000.80 in total paid to the TPS. = 17.375 % of the reduced salary which is the
true total cost of membership.
£ 21,917.01 Your net pay after your NI and tax

£ 104.22 Monthly net cost to you. (23,157.64-21,907.01)/12

Therefore under this method you have a £104.22 net monthly cost. If you were in the
TPS as an ordinary member the same pension would cost you net £91.69 (6.4% of
gross pay = the employees contribution, less 20% tax relief, less reduced employees
NI of being contracted out of £31.08p/m)
Although dearer for you to join this way I presume the £28,777 salary from the
private sector is more than you would get from a state school.

Immediate Implications:

Smaller savings for new house purchase by £104.22 p/m and reduced borrowing
power from most lenders. Those that use multiples based on old salary will most
likely charge a higher interest rate.

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OPTION 2:
THE PERSONAL PENSION ROUTE WITH SALARY SACRIFICE

Ask the employer to contribute the 5% to a personal pension or a stakeholder pension


provider of your choice and to use salary sacrifice also so that the employers total cost
and your net pay are the same as if you joined the TPS.
I have no doubt they will agree to such as it merely means their direct debit payment
goes to your providers choice not the employers choice of stakeholder provider it will
cost them nothing more and involve the same salary sacrifice calculation which will
be thus:

( PPP, referred to hereafter could be either a stakeholder or personal pension plan or a


self invested personal pension plan though a PPP I believe would be better than a
stakeholder and a SIPP unnecessary.)

£ 29,318.00 Gross salary


£ 3,053.82 Employers contracted in NI
£ 1,550.00 5% of old salary employers contribution to your PPP
£ 180.15 Employer NI savings paid to your PPP
£ 1,798.00 Salary sacrificed paid to your PPP
--------------
£ 35,899.97 Equal to the same cost to the employer of employing you.

£ 3,428.15 Paid to your PPP but you will still get SP2 being contacted in.
OPTING OUT VIA A PPP
If you contact out via a PPP the rebate with the contribution above will mean more
goes into your pension than via the TPS in option 1 however to say that which has the
bigger contribution will provide most is too simplistic a comparison.

Because opting out via a personal pension will be abolished in 2012 but not via a final
salary scheme such as the TPS I'm making this comparison ignoring the benefits for
you of contracting out each year till 2012 via a PPP and assume you remain contacted
in throughout. Doing so makes the comparison far easier to calculate and understand.

Immediate Implications:

Smaller savings for new house purchase by £104.22 p/m and reduced borrowing
power from most lenders though not as much as if you had joined the TPS as your
salary is not reduced as much .Those that use multiples based on old salary will most
likely charge a higher interest rate.

OPTION 3:
THE PERSONAL PENSION ROUTE WITHOUT SALARY SACRIFICE

There is a third option, that of you making contributions but doing so on a keeping
your net pay the same comparison means there will be less invested as you wont see
any investment of the employers and your savings on NI on those contributions you
make. In other words you'd be in the same boat as everyone else whose employer
wont do a salary sacrifice. That goes like this:

£104.22 you'd pay and get tax relief on thus = £130.28p/m . P.A. = £1,563.36 plus
employers contribution gross of £1500 = £3063.36 to PPP

Although the contacting out rebate would be based on the £31000 salary not the
educed one thee is still less going into your PPP so as it is not salary related only
consider this route if the employer effuses to do salary sacrifice which is unlikely.

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BENEFITS VIA OPTION 1 THE TPS

At NRD of age 65 pension = 1/60th of final salary for each years membership.

Salary now = £28,777.30/60 x 33 = £15827.52 pension in today’s terms.


However that is assuming your pay merely stands still in real terms with inflation
equalling pay rises in your salary. Historically national average earnings have risen by
more than the RPI .A fair guide to assume is a difference of 1% pa between them and
this should on average account for possible promotional pay rises too.
Therefore let's take the salary now and increase it by 4% p.a. and bring it back down
to today’s terms assuming 3% for inflation as a realistic guide.

28773.60*1.04^33= a final salary of £104,990.60

33/60ths of which = £57,744.81 pension.

Bring that down to today’s values and its worth:


57744.81*1.03^-33 = £21,771

So in today’s values you can forecast from the teachers scheme a pension in total of
£21,771 plus the basic OAP and a small SP2 based on your earnings up to today from
being contracted in. I guesstimate that to be around £500 a year.

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BENEFITS FROM OPTION 2 THE PPP ROUTE

Under a PPP there is no link to you unknown final salary it is simply what the value
of the invested contribution have grown to by retirement age and how that fund is
converted into an income that determines the income in retirement

Usually you control the contributions and where they are invested and you decide
how and when to take the income from the fund. The only difference here is that by
using salary sacrifice the employer pays the premiums so to take a payment holiday
you’d have to take the contribution as pay.

Assuming the same 4% for salary rises and 3% for inflation it's again a fair
assumption that a personal pension fund would grow at 5% above the RPI over the
long term. You can do worse especially without fund choices advise but you can do a
lot better. The 5% difference was justified and promoted to be used by the regulators
for many years I honestly do not know now what they use in illustrations now not
having seen a quote in 6 years or more but the difference still rings true I'm sure.

So we have, £285.68 P/M going into the PPP initially, escalating in line with your
earnings at 4% P/A yielding a return of 8%. At the end of 33 years that produces a
fund of
£806,840
£304,199 In today’s terms with 3% inflation.

Buy an annuity with it akin to the TPS pension and you'll get:
£ 14,905 P/A initially 5yr g-teed, rising likewise at 3% P/A and likewise providing a
spouses pension of 50%. Assuming the annuity rate available then is as miserable as it
is today.

Add to that the SP2 of £104 P/W £5,408 P/A and we have a total income of £20,313
£20,313 compared with the TPS. Of £21,771 does not mean the TPS is better, it just
means on those assumptions of RPI, NAE, the PPP yield and the annuity rate it works
out better.
For example take 8.5% as the PPP yield and the PPP works out better. You need really
to see what different assumptions will provide so play around with them in the spread
sheet .

ANNUITY RATES OR DRAWDOWN

Vitally important is the annuity rate. The 4.9% I've used is the best available today for
such an annuity. In reality it's pathetic, in my opinion no one should ever buy an
annuity with their pension fund. Not when they can leave it invested and drawdown a
bigger income.

When you draw the pension from a final salary scheme you have no choice as to it’s
type. They pay a pension that rises in payment and you will have to live beyond life
expectancy which is age 92 for a current 65 year old woman before you are better off
with a rising pension simply because what you lose in the early years of retirement
with escalation you gain in the latter. The underlying yield currently around 4.75% is
the same, as is your life expectancy.

Furthermore at retirement you may or may not have a partner who may or may not
have their own pension provision but the annuity from a final salary scheme such as
the teaches scheme is calculated as if you have a partner and want to provide a 50%
pension for him along with escalation. These benefits may well be unwanted but the
pension is calculated the same way for all members. With a Personal Pension you get
the choice of annuity and better still you can using drawdown instead you are not
locked in to the gilt yield available at that time leaving the fund to continue to grow
being invested.

Funding for an escalating income makes sense but buying one very rarely does and
very few do as it is better to have the higher income provided from a level annuity
while your young enough to enjoy it.

A final salary scheme does not allow you such freedom of choice but in theory you
can transfer out from one and go into drawdown however the transfer value is not
calculated on like for like annuity rates (currently a/rates are using an interest rate/ gilt
rate of 4.75%) Transfer values are calculated quite differently, more akin to the 8% or
so the scheme assumes for investment returns)

Annuities simply don’t even come close compared to drawdown which is why on the
spreadsheet I’ve included the maximum drawdown rate for a female aged 65 of 8.2%

There’s also a spreadsheet of the drawdown rates included so that you can see the
difference in income were you to retie at a different age and also assume a different
underlying future gilt yield . The maximum being the rate in the tables *1.2
DEATH BENEFITS.

To make a true comparison one ought to include the cost of life cover however the
cover within a final salary scheme is only there whilst employed whereas in a
personal scheme now that life cover with tax relief has been abolished only a return of
fund. so cover must be done via a life policy now. Not that this is a bad thing as you
decide how much and for how long you want it. As such there is no real way to
include the cost in this comparison.

Early Retirement
Change of employer
Career Breaks
Commutation for tax free cash
Transfer values
Final salary Scheme possible reduction of benefits
Divorce

There’s six other related subjects you should get some information about but your
question “which route should I choose?” I think you can make a decision on with
what I’ve said here and the spreadsheet itself which is easy to use just enter the
variables as figures in the yellow boxes and the results will be displayed in the black
ones.

If you do choose the PPP route then do it through an IFA don’t go the do it yourself
route you need advice on where to invest both initially and on going besides the
protection of the FSA.

Cheers

RIFA