Nearly half a million teachers in England and Wales could see a significant boost to their retirement income as a result of a little-known loophole. Often overlooked, this financial trick could potentially add tens of thousands of pounds to the retirement funds of those who worked in their profession before 2012.
The Underrated Pension Option
A survey has shown that more than 440,000 teachers may be unaware that they could improve their retirement income by simply withdrawing from their pension for 30 days.
While this option is no longer available, teachers still have the right to have the final years of their career taken into account when calculating their retirement income.
However, one cautionary note is in order. Not all teachers see their salaries rise at the end of their careers, and those who don't could see their pension income considerably reduced if they don't ensure that their early years are taken into account in the calculation. This is where the flaw comes in.
Given that the median teacher salary in England is £41,604 and £42,869 in Wales, this gap could have a significant impact on retirement income.
The Loophole That Could Benefit Thousands of Teachers
Normally, wages earned more than 10 years ago are not taken into account when calculating a teacher's final pension. However, there is a simple way around this problem. Once a teacher has not left the profession for more than five years, he or she can opt out of the pension scheme and then opt back in.
The effect of this is to freeze the entire previous decade, which can then be taken into account on retirement. By withdrawing and re-entering several times, teachers can continue to freeze ten-year periods, a method known as "hypothetical calculation".
The pensioner will immediately receive the higher of their last salary or three consecutive years of all available periods. If previous salaries are higher, they will be used instead. And, since inflation is added every year until retirement, these previous salaries are often higher.
Dave Fountain, a former teacher, discovered this flaw by "talking to older, wiser people who had been through it". He admitted that he discovered it late, because he hadn't been looking for it. In his case, he lost around £6,000 on his capital and £2,000 a year on his pension, a loss that has increased with inflation over time.
Since then, Mr Fountain has spent many hours developing a website and helping others to get more for their pensions. He recounted the story of a female teacher whose pension was being reduced. She told him that she needed to reach £15,000 a year before she could leave the profession6.
In the course of their conversation, she became emotional because she couldn't see how she could leave teaching until she had reached her target.
Asked to send her a pension statement, which gave an estimate of a teacher's pension income, Fountain said, "I don't know". On examining the figures, Fountain found that her pension was actually £16,000, 20% higher than the statement, and that her target had not been met.
Understanding the Pension Changes
Before 2007, teachers belonging to the pension scheme retired at the age of 60 and received part of their 'average salary' in the form of an annual income for life. These earnings were either their last salary or the average of the three highest consecutive salaries over the previous ten years, whichever was higher.
One 80th of this amount was accumulated for each year of pension contributions, plus a tax-free lump sum equal to three times this amount3.
In 2007, the retirement age was raised to 65. At the same time, the lump sum was abolished, but teachers now accumulated a 60th, which meant they received more per year.
Both schemes ended in 2015, but pre-2012 members could continue to accumulate 80ths or 60ths until 2022. Whatever the type of pension, it increases each year in line with inflation.