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Teachers are preparing for more industrial action over pension reforms. Photograph: Owen Humphreys/PA Photograph: Owen Humphreys/PA
Teachers are preparing for more industrial action over pension reforms. Photograph: Owen Humphreys/PA Photograph: Owen Humphreys/PA

Newly-retired teachers £8,000 worse off as pension cuts bite

This article is more than 12 years old
New figures show extent of loss over next 10 years, while for those relying on private annuities outlook is worse

Teachers who have just retired could typically end up almost £8,000 worse off over the next 10 years because of changes that took effect this year, according to a new study.

As teachers prepare for more industrial action over pension reforms, and with a mass lobby of parliament planned for 26 October, the life insurer Wesleyan said it had looked closely at how those who have retired are being affected by changes that have already been made.

As of April this year, public-sector pensions already in payment will be increased in line with the consumer price index (CPI) rather than, as previously, the retail price index (RPI).

In the past, CPI inflation has tended to be lower than RPI inflation. Wesleyan has modelled the effect of this change over the next 10 years, assuming the same differences between CPI and RPI. "The results show that a teacher who retired at the beginning of 2010 will see their pension reduced by more than £7,700 over a 10-year period," says a spokesman.

The calculations are based on the average teacher's pension income, which was just over £10,000 a year in 2009-10. They show that someone who retired on this amount could, after 10 years, expect a pension of £13,071, assuming CPI inflation follows the same course as over the past decade. However, the projected annual average pension would be £14,072 if the RPI measure were still being used. The total "loss" over 10 years would be £7,760.

Wesleyan asked members of the profession how much money they thought they would need to live on in retirement. The average answer was £19,800 a year. It also found that more than half of teachers (56%) plan to retire early. The company adds that, "encouragingly", 62% said they were already saving to supplement their income.

While the teaching unions accept the £10,000 current average annual income figure, they say this is hardly "gold-plated", and add that pensions for women teachers and lecturers are considerably lower than for men.

Fraser Smart at Buck Consultants, which specialises in retirement benefits, says that for someone at retirement, the switch from RPI to CPI will mean they are likely to lose 10%-12% of income over their lifetime. For a teacher who leaves the profession early – perhaps in their 40s – for another job, "the hit is as much as 25%".

Workers who do not have public sector, final-salary pension schemes also received another dose of bad news this week. The Bank of England's pumping of a further £75bn into the banking system in quantitative easing will push down gilt yields, and that means annuity rates will fall further, warned Tom McPhail of the independent financial adviser Hargreaves Lansdown.

"The benchmark-level single life annuity rate for a 65-year-old male [the annual income you will get from pension savings of £100,000] had already slipped below the £6,000 mark at the end of September. This week's announcement has produced a modest spike in gilt prices, pushing down the yield, which will fuel expectations of further annuity rate cuts to come."

Meanwhile, away from the teaching sector, another pension change that takes effect in six months' time could have a big impact on some high earners. In April 2012, the "lifetime allowance" – the maximum amount of pension and lump sum cash you can get from your scheme(s) that benefits from tax relief – is being cut from £1.8m to £1.5m. While the change won't affect most workers, investment experts this week warned older employees with big pension pots that anything over the new limit will be taxed at up to 55%.

HM Revenue & Customs says only money-purchase scheme members who have saved more than £1.5m, or final-salary scheme members entitled to a pension of at least £75,000 a year, are likely to be caught by the change.

But the investment group Skandia reckons that while £1.5m "sounds like a lot", someone 30 years from retirement "may only need a current pension fund of £197,000 to exceed that level before they retire" – though this assumes a 7% investment growth rate, which many might see as optimistic.

McPhail does not regard the issue as pressing for those in their 20s, 30s and 40s who are enjoying above-average earnings and building up decent pensions. They should keep an eye on the situation, but it is "extremely unlikely" that the lifetime allowance will still be £1.5m in 20 years' time.

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