Retire on full benefits before your State Pension age by buying out the early retirement reduction factor
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- Early Retirement Buyout Reduction
If you’re a member of the Teachers Pension Scheme (Scotland) 2015, you can take your benefits in full when you reach your State Pension age.
You can, of course, retire before you reach State Pension age but if you do, your pension will be reduced for early payment.
However, if you plan to retire after your 65th birthday but before your State Pension age, you can elect to pay extra contributions that reduce, or remove, this reduction.
To benefit from the early retirement reduction buyout, you must still be paying into the scheme when you retire and your State Pension age must be over 65.
For example, if you have a normal pension age of 68 you could buy out the reduction for three years and retire at 65. Alternatively, you could buy one year or two years and retire at 67 or 66 respectively.
Early retirement reduction buyout elections must be made within six months of joining the Teachers 2015 scheme for it to be effective from your first year within the scheme. If you don't apply within your first six months of joining the scheme, your application will only be effective from the beginning of the following financial year as highlighted in the examples below.
Example
Member joined 2015 scheme on 1 April 2023 (2023/24 year)
Scenario 1: Provided an early retirement reduction buyout application was submitted by 30 June 2023 the agreement would be backdated and effective from the beginning of the 2023/24 scheme year on 1 April 2023, and their employer would collect the arrears for their additional contributions.
Scenario 2: If the application was not submitted until September, the early retirement reduction buyout would only be effective from the start of the next scheme year (2024/25) beginning 1 April 2024 with additional contributions collected from this date.
Please note, you don't have to elect to purchase an early retirement reduction buyout within your first year - you may choose to do this at the start of a subsequent financial year.
How much will it cost?
The cost of an early retirement reduction buyout depends on your age in complete years at the day before the effective date of the arrangement and the number of years’ reduction covered by the arrangement. The effective date is your age at 31 March immediately before the intended start date of the agreement.
The contributions are payable in addition to your normal tiered contributions and on all your pensionable earnings. For example, if you have more than one employment contract you must pay the extra contributions on each contract up to your retirement date.
Important: If you change employment you must notify your employer with details of the extra contributions you are paying for the early retirement reduction buyout in order for it to continue.
Examples
Scenario 1
A 38 year old member joins the Scottish Teachers 2015 scheme with a normal pension age of 68.
The member has a salary of £35,000 p.a. at age 38.
They enter into an agreement to buy out the early retirement reduction for the maximum three years allowed immediately upon joining the scheme. They’ll pay the additional contributions until age 65 when they can retire and claim their pension in full, three years before the scheme’s normal pension age.
Additional contributions required to be paid by Member To allow the member to claim their 2015 scheme benefits without reduction three years before their normal pension age, the member will pay extra contributions totalling 2.76% of pay before tax each year, in addition to their normal tiered contributions, for 27 years.
If the member’s salary increases in line with inflation to age 65, then in today’s terms (and ignoring the impact of inflation over time*), the extra contributions they will expect to pay over their remaining working lifetime are 2.76% x 27 years x £35,000 = £26,080.
Additional pension payable to the Member In return, the member will be able to receive the pension that they have built up over these 27 years unreduced at age 65, rather than age 68.
This member would expect to receive an unreduced annual pension at 65 of £20,860 in today’s terms (and ignoring the impact of inflation over time) at age 65. This is £1,880 more each year than the annual reduced pension of £18,980 (calculated as £20,860 x 3 year Early Retirement Factor of 0.91) that they would receive at age 65 had they not paid the additional contributions.
The value that the member receives from this option then depends on how long they will be in receipt of their pension. For example:
- if this member were to survive 10 years into retirement, the extra pension (in today’s terms) paid to them would be 10 x £1,880 = £18,800.
- if this member were to survive 20 years into retirement, the extra pension (in today’s terms) paid to them would be 20 x £1,880 = £37,600.
Any surviving spouse’s pension would be unaffected by the member’s early retirement buyout option election.
In practice, the contributions a member will pay and the benefit they will receive depends on a number of factors, such as the age that they take out the option, their future salary increases, and their SPA (which may be subject to change in future). This above example is intended to be illustrative. It also does not take into account the impact of tax on either the contributions payable or the benefit in retirement.
*While a member’s salary, contributions and pension amounts would be expected to increase in future with inflation, this has not been allowed for this in the figures above. The figures have been presented in today’s terms to enable easier comparison of all figures on a like-for-like basis.
Example Scenario 2
A 50 year old member joins the Scottish Teachers 2015 scheme with a normal pension age of 67.
The member has a salary of £48,500 p.a. at age 50.
They enter into an agreement to buy out the early retirement reduction for one year immediately upon joining the scheme. They’ll pay the additional contributions until age 66 when they can retire and claim their pension in full, a year before the scheme’s normal pension age.
Additional contributions required to be paid by Member To allow the member to claim their 2015 scheme benefits without reduction one year before their normal pension age, the member will pay extra contributions totalling 0.91% of pay before tax each year, in addition to their normal tiered contributions, for 16 years.
If the member’s salary increases in line with inflation to age 66, then in today’s terms (and ignoring the impact of inflation over time*), the extra contributions they will expect to pay over their remaining working lifetime are 0.91% x 16 years x £48,500 = £7,060.
Additional pension payable to the Member In return, the member will be able to receive the pension that they have built up over these 16 years unreduced at age 66, rather than age 67.
This member would expect to receive an unreduced annual pension at 66 of £15,620 in today’s terms (and ignoring the impact of inflation over time) at age 66. This is £470 more each year than the annual reduced pension of £15,150 (calculated as £15,620 x 1 year Early Retirement Factor of 0.97) that they would receive at age 66 had they not paid the additional contributions.
The value that the member receives from this option then depends on how long they will be in receipt of their pension. For example:
- if this member were to survive 10 years into retirement, the extra pension (in today’s terms) paid to them would be 10 x £470 = £4,700.
- if this member were to survive 20 years into retirement, the extra pension (in today’s terms) paid to them would be 20 x £470 = £9,400.
Any surviving spouse’s pension would be unaffected by the member’s early retirement buyout option election.
In practice, the contributions a member will pay and the benefit they will receive depends on a number of factors, such as the age that they take out the option, their future salary increases, and their SPA (which may be subject to change in future). This above example is intended to be illustrative. It also does not take into account the impact of tax on either the contributions payable or the benefit in retirement.
*While a member’s salary, contributions and pension amounts would be expected to increase in future with inflation, this has not been allowed for this in the figures above. The figures have been presented in today’s terms to enable easier comparison of all figures on a like-for-like basis.
How to apply
Complete the form below to find out if you’re eligible to enter into a buyout agreement and to confirm the rate of the additional contributions you would pay. If you want to go ahead with the agreement, you’ll need to sign and return the form.
Once your election has been confirmed, your employer will be instructed to deduct the additional contributions from the effective date.
Please note that contributions towards buyout will not be refunded if you retire early on ill health grounds or as part of any death in service payment.
Revoking a buyout election
You can revoke your buyout election at any time by informing SPPA in writing. If you cancel your buyout election, you'll be credited with a proportion of your buyout based on the contributions you've made.