After being made redundant by British Airways last year, I have retrained as a teacher.
I have two BA pensions. The first is a final salary NAPS (New Airways Pension Scheme) that I contributed to from 1993 till its closure in 2018.
I also have around £40,000 in the money purchase British Airways Pension Plan/Aviva scheme that replaced it.
Career change: Should I move my pensions to the teacher’s scheme?
I am wondering whether it is worthwhile transferring both or either into the Teachers’ Pension Scheme.
My new salary is considerably less – and unlikely to ever match my previous salary at BA, hence I’m concerned about the ‘final salary’ implications.
Any advice would be gratefully appreciated.
Tanya Jefferies, of This is Money, replies: Deciding whether to transfer from one salary-related pension scheme to another is a tricky business.
Much depends on the rules and benefits of each scheme, as well your own personal circumstances, and your other savings such as your BA defined contribution pension pot.
These will all be so specific that it will be worth paying a independent financial adviser to go through the details to ensure you get this right.
Even if they tell you to keep your BA pensions where they are and effectively ‘do nothing’, you will still learn a lot of valuable information about your finances and be reassured that you have made a well-informed decision by the end of the process.
If you wish, you can ask an adviser to help you on a one-off basis, without signing up to a long-term relationship.
Ideally, ask for recommendations from friends and family to find someone good.
What are defined contribution and final salary pensions?
Defined contribution pensions take contributions from both employer and employee and invest them to provide a pot of money at retirement.
Unless you work in the public sector, they have now mostly replaced more generous gold-plated defined benefit – or final salary – pensions, which provide a guaranteed income after retirement until you die.
Defined contribution pensions are stingier and savers bear the investment risk, rather than employers.
You can search for financial planners on the Chartered Institute for Securities & Investment website – its ‘Wayfinder’ service is being revamped at the moment, but it has links to members across England, Wales and Northern Ireland.
This is Money also has a partnership with Flying Colours Life which helps people looking for an adviser.
Meanwhile, to point you in the right direction, we asked an experienced expert what you should consider when making this decision and what help you should expect from an adviser.
Gary Smith, chartered financial planner at Tilney, replies: The question you have raised is certainly an interesting one and, as you probably won’t be surprised to learn, is a highly complex one, requiring wider consideration than simply the ‘final salary’ implications of transferring between the two schemes.
There are so many complexities, not only in respect of the differences between the scheme, but also your personal circumstances (for example, your age, marital status, health condition and when you might opt to retire), and these would all need to be taken into account before a decision to transfer should be made.
In relation to your concern regarding the ‘final salary’, this would be dealt with in the way that the Teachers’ Pension Scheme would deal with any transfer payment.
The BA scheme would calculate a transfer value in relation to the NAPS scheme, and the Teachers’ Pension Scheme would then convert that transfer value into an equivalent pension benefit, with that benefit then subject to annual accrual up to retirement benefits being taken.
As such, having a lower salary in the future might not impact upon the value transferred, but the value of the pension benefit converted into a teacher’s pension could be very different to the deferred pension within the BA scheme.
I would definitely suggest that you seek advice, including a detailed analysis of each option, including what you should do with the £40,000 defined contribution pension pot you have built up, prior to proceeding with any transfer.
I would expect any such analysis to include an assessment of the following areas.
1. Retirement age – Pension schemes often have different retirement ages, with the TPS having a retirement age equal to your state pension age.
Gary Snith: The BA scheme has a number of different sub-sectors, with retirement ages of 60 or 65,
The BA scheme has a number of different sub-sectors, with retirement ages of 60 or 65, depending upon your period of membership.
If you retire before the normal scheme retirement date, early retirement factors can be applied and, if you do wish to retire before your state pension age, then confirming the retirement age is very important.
2. Retirement flexibility – You have mentioned that your earnings have reduced following your redundancy and, if you were to retain the BA pension, and the retirement age was say 60, you could commence drawing your pension at 60, whilst continuing to work as a teacher, thus reducing the impact of your reduced salary.
3. Accrual rates – The pension benefits that you have built up within the BA NAPS and the TPS will be subject to annual accrual rates, where the benefits built up are increased, often in line with inflation subject to caps.
These rates could well be different between the two schemes, and this could have a significant impact on the pension benefits provided.
Clarification of these rates would need to be made, and some analysis of the future projected values would be required.
Furthermore, escalation rates are also applied to pensions once they come into payment in retirement, and these could also be different, and over a 20 to 30-year potential retirement period, this could result in you reducing your pension benefits greatly.
4. Pension commencement lump sum – This is effectively the tax-free cash lump sum that you could take from each scheme when you come to retirement.
Within some schemes, the pension provides you with a pension and an additional lump sum, whereas in others, the scheme provides a pension and you have to exchange some of this pension to provide a lump sum if one is required.
How does ‘commutation’ work?
This is Money’s pension columnist Steve Webb explains here.
In these types of schemes, commutation factors will be used, and again these differ between the schemes.
If we assume that one scheme uses a commutation rate of 12:1 and the other uses 20:1, if you were to exchange £1,000 of pension for a lump sum, one scheme would produce a lump sum of £12,000 and the other £20,000, representing an £8,000 difference in this example.
Clearly clarifying this position is important.
5. Death benefits – All schemes will have rules about what will be paid out should you die, either before or after you have commenced drawing benefits.
These will differ between schemes, and will often be affected by your marital status or if you have any financial dependants (using the definition the scheme uses) at the point of death.
These could be vastly different, and you could reduce the potential benefits offered to your family by transferring, although this would need to be fully assessed.
6. Ill health – Similar to the positions on death, pension schemes also have rules relating to what options would be available to you should you have to retire on ill health grounds or, if you have been diagnosed with a terminal illness when your life expectancy is less than 12 months.
7. Scheme funding position – The trustees of the BA pension scheme produce an annual report detailing its funding position – in other words, does it have sufficient assets to cover the pension liabilities.
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
Where the scheme is in a surplus, this means that the assets are sufficient to cover the member’s pensions but, if there is a deficit, there will be insufficient assets to cover all pension benefits, and a plan will need to be put into place to make up this deficit.
In some circumstances sponsoring employers will fail, with BHS being a good example, and the pension scheme is moved into the Pension Protection Fund.
This could have a significant impact on your pension benefits, and this will be age related.
Whilst this is something to consider for the BA scheme, you would not have such considerations within the TPS, as the scheme is backed by the Government.
8. Partial transfer – Some schemes will permit you to do a partial transfer, rather than a full transfer, and this is something to establish regarding the BA scheme.
9. Your prospects as a teacher – You have only recently moved into this industry and you might not remain in this role until you retire. Therefore, you should consider whether transferring into the TPS in such a circumstance would make sense for you.
10. The McCloud case – As if things weren’t complex enough, the Government lost an age discrimination case brought by firefighters and judges, which will also impact upon the way pensions are calculated within the TPS.
The changes will be scheme specific, and are unlikely to be introduced until April 2022, but they could be applied retrospectively to pre-2022 pension benefits.
To conclude, as you will see from the above, the complexities associated with considering a transfer are significant, and making the incorrect decision could potentially disadvantage your retirement position.
Therefore, I would strongly encourage you to seek advice prior to making any decision to transfer.
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