Pressures on personal finances have never been more prevalent than they are now, but opting out of your pension could be a costly mistake and leave you falling short in old age, says Jacques Szemalikowski.

Beware false economies

Inflation, cost of living, heating costs and fuel costs – all this adds to the strain on personal finances and is impacting on so many fronts, driving a scale of industrial unrest that few have seen before. Inflation is at a 40-year high and forecast to remain high for some time yet. No wonder there is ongoing worry about the cost-of-living crisis and how those working in schools and colleges are going to pay their household bills. 

As this pressure on household income continues, I’d imagine that many colleagues are engaged as never before with their thicker jumpers, deeper knowledge of thermostatic controls and boiler flow rates and wider personal finances, which, of course, includes their pensions. 

You will have no doubt that both the Teachers’ Pension Scheme (TPS) and Local Government Pension Scheme (LGPS) are two of the very best, if not the very best, pension schemes available. As long-standing members of the schemes, ASCL members understand this in relation to their own personal pension situation. I would suggest that, as such, school and college leaders also have a moral imperative to ensure everyone in their institutions knows it too. 

Do the right thing 

As the cost-of-living crisis continues, colleagues can monitor pension opt-out requests and do all they can to ensure TPS/LGPS members recognise that it really should be a last resort. I believe that this is both pragmatic and goes to the heart of ethical leadership. With impossibly tight school and college budgets it may be tempting, equally, to save on the substantial employer contribution, should an employee decide to withdraw from the school. However, that would be the unethical thing to do. 

It’s important for TPS/LGPS members to understand that opting out of their pension will have a huge impact in the long-term and appreciate the damage that this could do to their standard of living in retirement. While for some, retirement may seem ages away, in the here-and-now, both schemes include very substantial protection for loved ones should the worst happen. This uniquely unqualified life insurance comes without the requirement for detailed medical examination, consideration of pre-existing conditions or detailed questionnaires involving elastic declarations and assumptions about lifestyle. Effectively, Critical Illness is included too with inherent ill-health compensatory benefits. 

Understandably though, pressure on household budgets will lead to considerations of opting out of pension schemes. Suspension of contributions would, after all, increase take-home pay each month, albeit after tax at the marginal rate. Scheme members would also lose out on the considerable employer pension contribution. Nevertheless, a reality check is that the impact on a scheme member’s retirement benefits down the line may be dramatic. While it may be possible to top up later in rosier times, this will inevitably be more expensive. While in the LGPS, it is possible to reduce contributions to 50%, the TPS is an all-or-nothing contribution scheme. Ongoing contributions, which after all are tax free, and trigger that substantial employer contribution, will limit the reduction to future pension provision. 

Inflation-busting benefits 

Crucially, we also need to consider inflation. Opting out of a pension scheme will generate more take-home pay equivalent to the pension contribution after tax and national insurance. This will then be fully exposed to the corrosive impact of inflation, currently in double figures. While interest rates are rising, they are yet to come anywhere close to beating inflation. 

On the flip side, scheme members’ pension contributions are inflation-proof in a way that will never be matched by any investment strategy on the taxed additional take-home pay resulting from opting out. Both schemes have a compound revaluation of your benefits every year matched to the Consumer Price Index (CPI) marker of inflation. In fact, the reformed Career Average Revaluation scheme in the TPS does even better, beating CPI by 1.6%. As the name suggests, that means that at the end of every tax year, the total sum of TPS members’ benefits are increased by CPI+1.6%. That won’t be beaten anywhere. 

When members finally get their annual pension, their annuity, it will often be their sole source of income. The annuity is inflation-proofed by annual index-linking too. 

Additionally, members have the security of knowing that schemes in schools and colleges are not subject to the pension volatility like that which followed last year’s ‘mini budget’. 

All in all, membership of TPS/LGPS represents the best value for money around.

Jacques Szemalikowski
ASCL Conditions of Employment Specialist: Pensions
@ASCL_UK

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