Specialist Financial Adviser, William Adams, from Wesleyan Financial Services, discusses common misconceptions when it comes to retirement planning for teachers and senior education leaders.
When talking to clients, I often find that many have a set idea of exactly when they will be able to retire and don’t always have the full understanding of what their overall financial situation will actually permit them to do, and when this could happen.
As a result, many of the conversations we have as advisers include assessing the finer details of the individual circumstances of our clients and then clearing up any misunderstandings to ensure that they are in an informed position regarding their options. We often find that once they’re in this position, it can completely change their outlook and in some cases, may even bring forward the date of their retirement or the start of their phased retirement.
Being a headteacher is a demanding profession and for many of our clients, having an idea of when they can retire is extremely important – therefore a lot of what we do is around helping headteachers to understand how and when this could happen. It may be that they need help understanding their Teachers’ Pension Scheme (TPS) and what that would look like if they were to take early or phased retirement for example. Or it may be that they have a lump sum that comes from that pension and would like guidance on how best to use that money – this is something that varies depending on individual circumstances, personal objectives and aspirations for the future.
Another common scenario is that a headteacher may have an Additional Voluntary Contribution Pension (AVC), in addition to their TPS, other personal pensions from previous employment, or it could be that their spouses or partners may have their own pension pots. In these cases, it can be helpful to gain an overall understanding of all these different numbers and what they could mean for your future – sometimes more can be done than you may have imagined.
Alternative pension provisions – understanding your options
For any client who has an AVC or other type of personal pension, there may be some decisions to be made regarding what to do with it. This type of pension may differ from defined benefit pension schemes such as the TPS which are generally of a more prescriptive nature – there is of course some flexibility as to when and how you can retire, however other than that, the scheme will dictate exactly what you receive and when.
With an AVC or other personal pension, you essentially build up your own pot of money and this means that decisions need to be made regarding what to do with it. Typically, there are two main options here: flexible access drawdown (FAD) or buying an annuity.
FAD allows holders over the age of 55 to take 25% of their pension tax free – regardless of whether they have retired or not – then they can dip into the remaining 75% as and when they require (it’s worth noting here that any withdrawals following the 25% tax-free lump sum will be taxed). Many find the flexibility that a FAD offers to be very appealing, however for others, managing a pot of money and deciding how much to take and when, can be challenging – the holder may feel that they are unable to use it, for fear it will run out or that they won’t have enough later in life. This is where a financial review with a Specialist Financial Adviser can be extremely useful – an adviser can use specific tools such as the cash flow modeller. This digital tool effectively maps out and demonstrates different options and their outcomes. It can be used for example, to explore different scenarios as to how to withdraw cash, whether that’s taking a tax-free lump sum or by taking an income from a FAD – various scenarios and their outcomes can be considered here.
To give an example, let’s look at the case of a 55-year-old headteacher intending to retire at age 60. Said headteacher had an AVC of £200,000 but still had a remaining mortgage to pay. When this headteacher set up their AVC, they were asked to provide a particular date and chose age 60, as a significant birthday. They assumed that only after this date would they be able to access their AVC – however, an AVC or other private pension can be accessed from age 55 (this will increase up to age 57 in 2028). In this example, by using the cash flow modeller, it was possible to demonstrate to the headteacher that by using their AVC to pay the remainder of their mortgage, it would allow them to work part time and enjoy a slower schedule until they took their Teachers’ Pension at age 60.
What we often find is that as with any situation in life, you don’t know what you don’t know – you may think that you don’t need financial guidance, however there are often things that you may have done, that could have had a better outcome, or perhaps there are things that you could be doing and that you’re not doing at all, simply because you are not in a fully informed position regarding your options. Depending on your individual circumstances, it could potentially make more sense to access an AVC or personal pension now, or at a later date, or you may wish to explore alternative options such as an annuity – this is where professional guidance can be highly valuable.
Buying an annuity
An annuity essentially converts your savings or pension pot into a guaranteed income. This can either be for the rest of your life or for a fixed period of time, depending on your individual requirements. Although this comes at a cost, for some people having this reassurance of a guaranteed income is invaluable. It’s worth bearing in mind however, that there are many different options when it comes to buying an annuity, and it’s important to understand the differences.
A fixed term annuity may be viable where someone might only have a need for an income until their state pension kicks in for example. Most of it comes down to individual circumstances – what may have been right for a colleague, or a friend will not necessarily work for you. It’s also worth noting here, that if you do opt for an annuity, the decision is irreversible. Whereas if you take flexible access drawdown, there is still the option to buy an annuity later on.
How can specialist support help?
Having a review and gaining a clear understanding of your financial position, can potentially give headteachers more confidence to make life changing decisions regarding their future. Often what we find is that prior to gaining a full understanding of what their individual numbers means to them, many headteachers simply feel that they don’t have the provisions in place to be able to take a step back from full time hours.
Senior leadership roles within the education profession can be extremely stressful and impact upon mental health. It’s not uncommon for us as advisers to come across headteachers in their late 50s who are ready to take a step back from the profession but believe that they need to struggle through the next few years, whereas in actual fact their circumstances may be such that they could potentially take their TPS early. This can be transformative to individual lives – knowing that there is the ability to work for fewer days in the week and spend time doing the other things that you want to do.
Our job is to help headteachers understand their options, make informed decisions and then think about the best ways in which to approach them to ensure the best possible outcome.
If you would like support or guidance on understanding your financial position, speak to a Specialist Financial Adviser at Wesleyan Financial Services for a financial review by visiting: https://www.wesleyan.co.uk/campaigns/naht-specialist-financial-advice Charges may apply. You will not be charged until you have agreed the services you require and the associated costs.
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About: William Adams is a Specialist Financial Adviser, from Wesleyan Financial Services, supporting teachers, school leaders and their families with financial planning to secure their financial futures.
Wesleyan Financial Services Ltd (Registered in England and Wales No. 1651212) is authorised and regulated by the Financial Conduct Authority. Registered Office: Colmore Circus, Birmingham B4 6AR. Telephone: 0345 351 2352. Calls may be recorded to help us provide, monitor and improve our services to you.