Best Practice

Early retirement: Five things teachers must consider

More teachers than ever before are considering early retirement. Lee Quinn, a specialist financial advisor, outlines the key factors to keep in mind for those considering stepping away from the profession

The pressures of the pandemic have put a huge strain on teachers, prompting many to rethink their personal and professional ambitions. For some, sadly, this means retiring earlier than planned.

Research conducted for Weselyan by TeacherTapp and due to be published soon, has revealed that 21% of headteachers at schools in England accelerated their retirement plans in the 12 months to April 2021, with 8% now planning to retire before the end of 2022.

What’s more, 19% of teachers with more than 20 years’ experience are now planning to leave the classroom early, with those who have changed their plans pointing to a lack of work/life balance (83%), high workload (72%), and stress (70%) as the leading drivers.

Taking early retirement can be a big step, especially when it comes to finances. For those thinking about taking the plunge, here are five factors to keep in mind.

Review your future plans

Identifying and setting priorities is essential for any retirement plans.

The very first step should be to consider your retirement goals and ambitions – asking important questions such as what you want to spend your time doing, whether you will want to continue working, and (crucially) what your expenses will be.

It will be important to be aware that the cost of retirement is likely to change as you get older. For example, you might need to pay for the cost of care in later life.

Determine your income

The next stage is identifying what your income sources will be and whether it will be enough to cover your retirement ambitions.

Sources of income could include a pension in the Teachers’ Pension Scheme (TPS), a personal pension, the State Pension, and your own savings and investments – such as shares and property.

You will need to consider how you will access this money and whether it is easy and quick to do so. For example, there may be rules around your pensions, savings and investments that could affect when you can access your pot – and consequently what you can afford to do, when – as well as tax implications. Careful planning and consideration are essential to know how to get the most of your retirement income.

Understand the TPS rules

If you are a member of the TPS, it is important that you know the rules when it comes to early retirement.

As part of the TPS you are automatically entitled to your full pension benefits if you retire at your Normal Pension Age (NPA).

If you wish to retire early, you can start drawing your pension from age 55.

For this, you will need your employer’s permission, and you will face an early retirement penalty, meaning you will receive less benefits than if you were to retire at your NPA.

One option that might be preferred, particularly if you wish to continue working and securing an income, is opting for a “phased retirement” – allowing you to either move to a less senior position or reduce your teaching hours.

In the TPS, you can take up to 75% of your pension while you work, provided you have your employer’s permission, and your new salary is 20% less than your previous 12 months’ averaged earnings.

However, keep in mind that if you take your benefits before your NPA they will be reduced – the same as if you choose to take an early retirement.

Prepare for McCloud

A major development affecting members of all public sector pension schemes – including the TPS – is the “McCloud” case.

This ruled that changes made by the government to pension schemes in 2015 were discriminatory to younger members.

As a result, members who were in service before March 31, 2012, and on or after April 1, 2015 – including those who have taken their pension benefits since April 1, 2015 – will now get to decide which scheme they accrue benefits for the period 2015 to 2022. The choice will be made when they access their benefits.

Legislation needs to be in place before teachers can make this decision. However, when the time comes, teachers – even if they have already retired – will need to be ready to make the choice.

The “right” option will depend on individual circumstances and could be difficult to calculate. Here, speaking to a professional financial advisor who understands the TPS and the McCloud judgement will be key.

Seek support

Retirement planning can undoubtedly be complex – and even more so when factors such as TPS rules and the McCloud judgement enter the mix.

Seeking the help of a specialist financial adviser can make all the difference.

For example, the challenges of the pandemic and a change in personal circumstances meant Lauren (not her real name), a teacher of 27 years, wanted to take early retirement at 50.

But she was concerned about the financial implications – particularly, maximising the return on her savings, ensuring she could meet her on-going costs, and knowing what income she could access, when.

By putting a strategy in place that included opening a new ISA to help make her savings as tax-efficient as possible and opening a new pension plan for her and her partner, it gave her the confidence she needed to take the plunge.

Now her finances are in order, she has a clear sight of what income she will have and any future adjustments she may need to make.