Starting your first teaching job can be both exciting and daunting and there is much to get to grips with when transitioning from the training process to being a full-time classroom teacher.
As you embark on your teaching career and navigate your first couple of years in the profession, there are some important things to be aware of from a financial planning point of view to help you to better prepare for your future.
The Teachers’ Pension Scheme (TPS)
You will likely already be familiar with the TPS. Understandably, thinking about the end of your career at a time when you are only just getting started may not be top priority right now.
However, gaining an understanding of the scheme and what it offers can help you to make well-informed decisions as your career progresses.
The TPS is a defined benefit (DB) pension scheme. This type of workplace pension guarantees a specific income for life (throughout retirement).
Its structure is based on your annual pensionable earnings, revalued each year – this essentially means that the more you earn, the more you contribute.
Any early career teachers (ECTs) will now automatically be enrolled into the Career Average Revalued Earnings (CARE), unless they opt out.
How is the TPS different to a personal pension?
A personal, or private, pension is a defined contribution (DC) scheme. This essentially means that the amount of pension you get in retirement is defined by the contributions paid into it and investment growth (the capital in defined contribution pensions is invested). This means that you build up a pot of money which can be used to provide an income in retirement.
Considering opting out of the TPS?
A growing number of ECTs are choosing to opt out of the TPS and contribute to a personal pension instead or alternatively choosing to “take a break” from pension contributions.
One of the most commonly cited reasons for this is that the employee contributions are considered too expensive. By opting out you will of course see an increase in your monthly take-home pay – but is it worth it?
To make that decision, it is a good idea to take the time to fully understand exactly what the TPS offers and what this means to you.
One of the greatest advantages of the TPS is that it offers an inflation-linked, guaranteed income during retirement that will give you a monthly replacement of your salary, which is not impacted by world events and market fluctuations, for as long as you are alive.
When you draw from a personal pension, it is essentially coming out of a pot of funds that will eventually dry up. While it is possible to buy an insurance product known as an annuity with a personal pension that will buy you a guaranteed income, the cost of this is significantly higher.
Understanding your contribution
Your contribution will depend on your salary band, but as an ECT this is likely to be between 7.4% and 8.9% of your salary. While this may seem like a sizeable amount, it is worth noting that the TPS employer contribution is currently 28.68%.
To put that into perspective, let’s imagine a self-employed individual looking to match the TPS pension contribution of an ECT with a pension contribution of 7.4% and an employer contribution of 28.68%. This individual would need to pay 36.08% of their monthly salary into their personal pension to match the total TPS pension contribution.
It is also worth noting that, by law, the minimum employer contribution under pension auto-enrolment is currently set at 3%.
Employers are under no legal obligation to pay more than this. While many employers offer a more competitive contribution towards their employees’ personal pension scheme, it is highly unlikely to be as generous as workplace pension schemes such as the TPS.
The TPS also offers other employment and pensionable benefits, such as death in service. This may include a lump sum payment, a spouse’s pension, and an ill-health retirement pension.
It is worth bearing in mind that the TPS is linked to state pension age, which is not a fixed number. This does not mean that you won’t be able to access your pension earlier, but currently there are penalties for doing so.
In summary, the two types of pensions – defined benefit pensions such as the TPS, and defined contribution (personal pensions) – are very different. What we often see as advisers, is that many teachers do not appreciate the value of the TPS until they try to replicate it elsewhere.
What might you need to think about as your career and life move on?
Many teachers in their early career may already be thinking about saving to buy a property. It might be useful at this point to consider using an ISA to help you start to save.
Something else to consider is protecting your income. While most teachers are entitled to sick pay, if an illness or an accident meant that you could not work past the period of time covered by your sick pay (this is typically on a sliding scale based on length of service), then this could potentially result in financial difficulty.
Protecting your income offers the assurance that should the unexpected happen, you would have one less thing to worry about. Another advantage is that taking out income protection from a young age is generally cheaper as a younger person is less likely to have any existing health conditions that could affect whether cover is provided or not.
How can specialist support help you?
Getting support from advisers who understand the unique challenges teachers face can make a big difference. Our team of dedicated specialist financial advisers at Wesleyan Financial Services only work with teachers and education leaders.
They are experts on the TPS and can offer holistic financial planning to ensure that you are supported through all of life’s milestones – from the beginning of your career, to getting onto the property ladder or remortgaging, through to retirement, and everything in between.
Further information
If you would like support or guidance on understanding your financial position, speak to a specialist financial adviser or planner at Wesleyan Financial Services for a financial review. Find out more via www.wesleyan.co.uk/financial-advice/teachers
Charges may apply – you can earn more about our charges by clicking here. We will not charge you until you have agreed the services you require and the associated costs.
- Becky Muller is a specialist financial adviser at Wesleyan Financial Services, which supports teachers and their families with financial planning to secure their financial future. Visit www.wesleyan.co.uk/financial-advice/teachers
Sponsored content: This article has been published by SecEd with sponsorship from Wesleyan Financial Services Ltd. The article was provided by Wesleyan Financial Services Ltd.
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