Retirement breakthrough

There is a way for members of the Teachers' Pension Scheme to receive their whole pension by age 60 and continue working in the same post. David Blake explains.

The Teachers' Pension Scheme, for members who joined before 1 January 2007, has a normal retirement age of 60. This means that those who continue working into their 60s get fewer total benefits over their lifetime. Although the extra years they work will increase the size of their annual pension in two ways - they will have additional years of service and they may receive pay increases above inflation - it is unlikely that this will compensate for the loss of pension owing to the late start to taking benefits.

For members of the scheme who take their pension and then return to work as a teacher, there is a limit to how much they can earn before their pension is abated (reduced). If members take their benefits and return to their previous post, all of their pension would be abated, though they would at least have received their tax-free lump sum early. But...

Pension abatement does not apply to those who take actuarially reduced benefits or phased retirement benefits. These pensioners can earn as much as they like in teaching-related posts (everyone can earn as much as they like in other employment). Therefore if you take your benefits by one of those two methods you could be re-employed in your previous post and have both your pension and your salary!

Both actuarially reduced benefits (ARB) and phased retirement lead to some reduction in income. In the case of ARB, for each month before the age of 60 that benefits are taken, the accrued pension is permanently reduced by about 0.5 per cent. To minimise this reduction you would need to take your benefits at 59 years and 11 months of age, but the gain is there with earlier retirements.

To be able to do this, you obviously need the full support of your employer. You are resigning your job and being re-employed. There needs to be a break in employment; one day is sufficient but some local authorities might want a month.

The purpose of the break is twofold. First, it enables the employer to sign that the applicant has completed pensionable employment. Second, it breaks continuity of service for a variety of employment rights and employers usually want this in exchange.

The new period of employment can also be pensionable and benefits can be taken, provided at least one year's service has taken place. Obviously the new pension is based on a new final salary and on only the years which have been worked since the change in employment. However this does mean that, despite the break, all of one's service has contributed to a pension.

Weigh the risks

There are obviously some risks in taking this action and advice should be sought. If, during the second phase of employment, you receive significant pay increases, the higher salary will be applied only to the service after the break and you will miss out on a significant increase to your pension.

You will also have some reduced employment rights in the new employment, for instance the period over which sickness pay is paid will initially be much shorter. However there is no qualifying period for the payment of a death grant.

Some members take posts as temporary heads and deputies when they are in retirement. Clearly, if they have taken ARB they will benefit from the full salaries being offered.

The second option, the new phased retirement provision, is actually designed for someone to take both a pension and a salary but the new salary has to be 25 per cent less than the former salary for at least one year. If this suits your circumstances there should be an overall gain but probably not as much as taking the ARB option.

In case members wonder if this is 'cheating the scheme', it must be pointed out that the benefits which are going to be paid are only those which have been earned. There is no additional payout from the scheme here; it is the new salary which is the extra. Instead of being employed again as a school leader, you could get a highly paid post in another field and you would be entitled to both salary and pension, even if you took age retirement.

It is a Treasury rule rather than a Teachers' Pension Scheme one which requires abatement of pension if a high salary in teaching is earned after taking age retirement.

David Blake is ASCL's pension consultant