Music teacher goes out on high note

Christine Stanton
Age: 56
Lives in: Huddersfield
Occupation: Teacher
Earns: ?31,080
Mortgage: ?9,000
Debts: None
Investments: Isas ?10,500
Pension: Member of Teachers' Pension Scheme, plus
AVCs
Aims: Wants to know whether to take pension early
and what to do with redundant mortgage endowment

Christine is head of music at a secondary school and loves standing up in front of a class and teaching children. But, like many teachers, she feels ground down by the other pressures of the job and has decided to take early retirement at the end of this school year.

She says: 'Since the beginning of this term, I have been working every evening and weekend on planning, work schemes, reviews, assessments, etc, etc, etc. I could continue to do it but I feel it would affect my teaching. I want to go out on a high note. I don't want to fade out. So while it may not be so sensible financially to retire now, I've decided I want my life back.'

But she is in something of a dilemma about her pension - should she take it as soon as she retires or wait until she reaches 60? If she starts to take it immediately, it will be actuarially reduced to reflect her younger age and the fact that she will be receiving it for longer.

She intends to continue working as a supply teacher - the amount will depend on whether she takes her pension or not. She is confident she will find as much supply work as she needs, although she admits she is not as keen on this type of work because she prefers working as part of a team. But she says: 'If that is the price of a hassle-free life I am prepared to pay it.'

To boost her pension she took out an additional voluntary contribution (AVC) contract with Prudential several years ago but stopped paying into it when she read some adverse publicity about AVCs.

She wonders now whether it would be worth buying 'added years'. Her current membership of the pension scheme dates only from 1983 as she withdrew her early years of contributions when she had her first child and then spent eight years living abroad with her then husband.

When she does take her pension, she is not sure whether to take part of it as a lump sum or as extra pension. She does not need the cash for anything in particular. She says: 'My main plans when I retire are to spend more time on my music and doing what I want to do.'

The other topic she would like advice on is her endowment. She switched to a repayment mortgage last year and since then has been overpaying monthly and whenever she has saved a lump sum - she is planning to pay off another £3,000 by the end of this year.

She can still afford to pay her endowment premiums but if she cashed it in or sold it second-hand, this would enable her to clear the remainder of her mortgage. She is also wondering whether or not to complain about having been missold her endowment mortgage, originally set up to run past normal retirement age.

Adviser 1: Gillian Cardy

If Christine retires three years early she will
receive ?7,027 multiplied by 3 - ?21,081 gross,
before she reaches age 60. If she waits until she is
60 to get her pension she will forgo this sum but
will get ?8,382 per annum from age 60. This is
?1,355 per annum more than she would get if she
took her pension at 57. It would therefore take her
15.5 years (?21,081 divided by ?1,335) to make up
the money she had forgone.

The sooner she receives her pension tax-free
lump sum the sooner she could repay her
mortgage. She could then apply the money she
saves to other savings objectives, such as an Isa
or a stakeholder pension.

Given the short time until she plans to retire I
would not think that buying added years now
would be advantageous. As for her AVCs, it is
possible that there may be a market value
reduction if she takes the benefits ear lier than
planned. However, it may be possible to postpone
taking the AVC benefits until she is 60.

Having cleared her mortgage, she could consider
making a stakeholder pension contribution in
each tax year, maximum ?3,600 gross, ?2,808 net,
and then immediately purchase a personal
pension annuity to boost her income.

I would not be inclined to sell the endowment
now because of market value reductions and poor
surrender values. I would keep it going as it will
provide a nice additional capital sum. If she finds
she cannot afford the premiums she could
probably make the policy paid-up.

Christine should keep some capital in tax-free
cash Isas and use some of her lump sums to
purchase mini stocks and shares Isas.

Gillian Cardy works for financial advisers
Professional Partnerships.

Adviser 2: Darryl Connor

If Christine draws her pension immediately, the
income will be reduced to reflect the fact that it
will be paid for longer. Health and life
expectancy play important roles in deciding
whether to defer a pension. If your life
expectancy is poor, it is better to take the benefits
immediately. But if you expect to live long into
retirement, then deferring provides better value.

Under current rules, teachers cannot elect to take
a higher pension income and forgo the lump sum.
As Christine's priority is income, she should
consider investing this capital.

Christine has a sizeable AVC fund with
Prudential's with-profits fund. The terminal bonus
will probably be reduced so Christine could
consider switching into a cash or gilt fund to
protect the value of the fund. Prudential may,
however, apply a market value reduction. They
will inform Chris tine if this applies, upon her
request. Added years provide more guarantees
and so tend to be quite expensive the nearer you
are to retirement age.

Christine may also consider contributing to a
stakeholder pension once she begins supply
teaching. This type of plan benefits from tax relief
on contributions as well as tax concessions on the
growth. It can be drawn upon at any point, up to
age 75.

I would seriously consider whether to keep the
endowment going as it will be a drain on income
for many years. Christine could consider selling it
on the secondhand market. If Christine wishes to
pursue a compensation claim, Scottish Widows
should be able to say who recommended the
policy originally.

Darryl Connor works for financial advisers Towry
Law.

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