Why buying “added years” was so beneficial for Teachers compared to FSAVC plans

Many of my teacher clients were advised to save extra for their retirement with an FSAVC (which stands for Free-standing Additional Voluntary Contribution) Pension Plan. The vast majority, however, would have been better advised to buy “added years” in the Teachers’ Pension Scheme itself. Here’s why “added years” would have been such a better choice.

In the UK, the Teachers’ Pension Scheme (TPS) offers a defined benefit pension plan to eligible members. The scheme has evolved over the years, but before 2008 “added years” was a concept within the scheme that allowed members to purchase additional years of pensionable service. This was a valuable option for teachers, most of whom do not join the profession until their early 20s and so would not build up the full 40 years needed for maximum retirement benefits. Buying “added years” therefore was an excellent way to enhance their retirement benefits in several ways:

Increased Pension Income: Buying added years allows teachers to increase the number of years of pensionable service used to calculate pension benefits. Since the Teachers’ Pension Scheme is a defined benefit scheme, the amount of pension income paid is based on a formula that considers pensionable earnings and the length of service. Adding more years to that service increases retirement benefits.

Early Retirement: Purchasing added years also enabled teachers to retire earlier with an unreduced pension. The standard retirement age for the Teachers’ Pension Scheme (before more recent changes) was 60, but some teachers may want to retire earlier. Adding extra years to normal service can help teachers achieve this without a significant reduction in pension benefits.

Retirement Planning Flexibility: Added years provide flexibility in retirement planning. It was possible to choose to buy added years at different stages of a career, depending on financial circumstances and long-term goals. This flexibility allowed teachers to adjust pension benefits to suit individual needs.

Tax Efficiency: Contributions made to purchase added years would be tax-deductible at a teachers’ highest marginal rate of income tax. So, for a higher rate tax-payer, a gross contribution of £100 per month would only cost £60. This “tax relief at source” provision made added years highly attractive, compared to FSAVCs, where higher rate tax relief needs to be claimed from HMRC.

Protecting Loved Ones: The Teachers’ Pension Scheme also included survivor benefits with added years. Increasing pensionable service through added years also enhanced the financial security of dependants in the event of early death in service, ensuring they would receive a higher pension or lump sum.

It’s important to note that the value of buying added years in the Teachers’ Pension Scheme depended on individual circumstances, such as pensionable service, earnings, financial situation, and retirement goals. But generally speaking, they were far more suited to teachers planning to stay in the profession a long time than would be paying FSAVCs.