The Daily Telegraph - Saturday - Money
‘How can we boost our daughter’s
Pension pot?’
QMydaughter is a primary school teacher in a private school. Several of her colleagues have told her that the pension scheme into which the school pays is far inferior to the pension scheme available within the state sector.
Is there anything we can do that could help our daughter so that she gets a comparable pension return when she retires? She is 28 years old now.
– Lorraine C, via email
AAs
your daughter has found out, the pension benefits offered by the public sector for teachers can be vastly different to that operated by the private sector, and more generous.
The public sector Teachers’ Pension Scheme is a “defined benefit” scheme, which provides a guaranteed annual income for life, with annual inflationlinked increases to pensions in payment. It is “unfunded”, meaning there is no pot of cash being invested; rather, it is funded from taxation.
Benefits are based on salary, length of service and the scheme accrual rate.
For example, you might “earn” 1/60th of your salary for each year of service. The generosity of the scheme has gradually been cut back over the years to reduce government costs.
Originally a truly gold- plated final salary scheme, it is now a career average scheme, and this is the only option open to new recruits these days – although there are special benefit rules for teachers with long service.
Despite the cuts, this is still incredibly generous compared to the majority of pension schemes in the private sector, which closed their defined benefit schemes many years ago, and have largely been replaced by defined contribution schemes that have no guarantees or inflation protection.
‘FINAL SALARY’ VERSUS ‘CAREER AVERAGE’
Under a final salary scheme the benefits are based on your salary close to your retirement – your final salary, which is almost always going to be your highest.
If you have 30 years’ service in a 1/60ths scheme, you are entitled to 30/60ths or half of your salary.
For a “career average” scheme, the link with your final salary is broken. Members build up a pension based on their pensionable earnings each year and the scheme’s accrual rate (currently 1/57th for the Teachers’ Pension
Scheme). The pension built up each year is then revalued to allow for inflation and added together. This type of scheme will produce a lower pension than a final salary fund.
Under a defined contribution scheme, the value of your pension depends on the contributions paid in and the investment return, as well as how you decide to take your pension: do you take it all in one go, or in ad hoc or regular amounts, for instance.
HIGHER PENSION CONTRIBUTIONS The Teachers’ Pension Scheme is open not only to state schools, but also to independent schools. There has been a mass exodus of independent schools from the scheme since 2019 when employer contribution rates went up from 16.4pc of staff salaries to 23.6pc of total pensionable earnings.
To reduce costs, many independent schools left the scheme and replaced it with private sector defined contribution schemes.
Teachers saving in the state Teachers’ Pension Scheme pay pension contributions of between 7.4pc and 11.7pc rising with salary. This is typically higher than the employee contributions made in the private sector.
Ruling out your daughter becoming a teacher in the public sector and gaining access to the Teachers’ Pension Scheme, there are a few things she can do. She can increase her own pension
contributions if she can afford it. She should also investigate whether her school offers “employer matching”, where if she chooses to pay higher pension contributions, the school will match them.
She could also review how her pension funds are invested.
The vast majority of pension savers leave their pension invested in their scheme’s default fund, but selecting riskier funds (if she is comfortable with that) could yield higher returns over the long term.
Every parent wants long- term financial security for their children. The good news is that you can help your daughter to achieve this by making contributions directly into her pension – these are called third-party contributions.
The usual pension tax rules apply. Your daughter will receive tax relief on contributions up to the greater of 100pc of her UK earnings or £3,600 per tax year. Even though you pay the contributions, they will be treated for tax purposes as though your daughter has paid them herself. This means your daughter will benefit from the tax relief on the contributions made by you.
The maximum amount you can pay into your daughter’s pension is limited to 100pc of her relevant UK earnings less the amount she already pays into her pension. So, if your daughter earns £ 30,000 a year and pays 5pc into her existing pension, in theory you can pay in up to £ 30,000 less £1,500, so £28,500.