One of the best things about my role as a Financial Planning Consultant is being able to make clients’ dreams a reality, and whilst in some cases it is advising on new products and planning, in many cases it’s about clarifying and reorganising what a client already has.
In a recent meeting with a new client, I was delighted to give her the news ‘Yes, you can retire.’
As a long-serving teacher my client was still 4 years short of the ‘normal’ retirement date on a particular scheme, which would usually be 60. We discussed her existing income and expenditure, and what her spending plans would be in retirement, as clearly this is very important.
My client confirmed in an almost embarrassed manner, that she had no idea how pensions worked as they are not really easy to understand. I comforted her and explained that that’s what I was there for – to explain these things in a way she could understand fully.
The Teachers’ Pension Scheme
As the Teachers’ Pension Scheme calculates pension income based upon age and earnings, we agreed that if she did retire it would benefit her to do it after her next birthday to qualify for a further uplift in income.
I went on to explain that due to the length of service, she would be a member of the ‘old’ scheme and the pension would be based upon an average of her 3 ‘best’ year’s salary.
We looked at the Teachers’ Pension Scheme website to see what her income would be at her normal retirement age of 60, and also the impact of taking her pension 3 years earlier – which in this case was a reduction of roughly £2,000 per year. Her income at age 60 was going to be sufficient for her ongoing needs, however the lower pension would leave her short.
I explained that with the Teachers’ Pension there is a tax-free lump sum which would also be £5,000 lower, if taken earlier than the normal retirement date.
The Agreed Plan
A final plan was agreed that would allow my client to retire by Christmas 2020 – 3 years before normal retirement age - which she was very pleased with. Further discussion led onto a conversation about how the period between December 2020 and September 2023 would be funded, as roughly £60,000 was going to be required over that period.
We talked about her personal savings which could cover the expenditure needed between now and normal retirement and discussed that this was actually held at her high street bank earning her ‘next to nothing.’ I therefore advised that if she could maximise her pension contributions prior to retiring, to make use of all tax relief available, she could contribute to the Teachers’ Pension, effectively purchasing additional years but in this particular case we agreed an alternative option of contributing to an additional personal pension.
By contributing £64,000 to an additional pension, the pension company could claim immediate tax relief and claim £16,000 ‘tax back.’ In addition she could use the pension contributions to effectively take the client out of higher rate tax, saving them a further £5,000. A £21,000 return on £64,000 over 2 years is a good return in anyone’s view!
Tax relief on contributions increasing the amount in her new pension. £64,000 becomes £80,000 when basic rate tax relief is added.
Additional higher rate tax relief via her tax return of roughly £5,000.
A flexibly accessible personal pension pot to supplement her Teacher’s Pension scheme.
This new personal pension pot could then be used to give the client the income needed before the actual Teacher’s Pension Scheme begins. Overall, my new client left my office practically skipping, delighted to understand what she had and comforted that she would be able to retire as she’d hoped.
If you, or anyone else you know, would like to discuss how I can help them make their retirement a reality, please contact Steve Shovlin on 01228 690200 or email Stephen.shovlin@armstrongwatson.co.uk
