AVC payment into USS scheme

dllive

Hi all,

I would like to make an additional voluntary contribution into my USS pension scheme. I asked the accountant whether it was worth doing this, or if Id be better off putting the money in my SIPP. He said that I would be better off making an AVC into my company pension scheme (USS) because it would likely get me more than in my SIPP (which is mostly invested in Invesco Perpetual High Income Fund).

He came back with the following scenario: If I made an AVC of £5k (I wouldnt be looking to pay this much in!) then it would get me £298.14 of 'additional pension purchased'. The accountant is on holiday so I cant ask him these questions:
- Would that be £298.14 per year or per month?
- I know this is crystal ball stuff, but do you think this provides better value than investing the £5k into my SIPP (which is invested in defensives).

I suppose my USS pension is based on my average salary, so Im guaranteed to get a return, whereas my SIPP is based on the whim of the markets.

Any thoughts would be muchly appreciated.

kidmugsy

"Would that be £298.14 per year or per month?" If you'll pardon the expression: hee, hee, hee.

Does your employer offer Salary Sacrifice? If so, probably best to buy there; your choice is then between additional years (that's what you mean, I imagine) or an invested AVC with the Pru. A friend of mine once bought extra years at USS and then moved to a university with a later retirement age; his money was wasted because he got credited with the extra couple of years by working longer anyway. If you are confident that that won't happen to you, and if you are confident that USS is in good financial nick (it wasn't a few years ago) then I suspect that buying additional years will look better value.

dllive

Thanks kidmugsy:

OK, I guess thats £298.14 per year then!

Yes, my employer does offer salary sacrifice for the payments I make automatically to my pension each month. I guess that goes for my AVC too. Why would this be better than to give them a cheque?

Im not sure what you mean by 'additional years'. (Sorry, my knowledge on pensions is minimal to say the least!)

I have no idea whether USS is in good financial nick. How would I check?

Cheers.

kidmugsy

dllive wrote: »

Yes, my employer does offer salary sacrifice for the payments I make automatically to my pension each month. I guess that goes for my AVC too. Why would this be better than to give them a cheque?

Im not sure what you mean by 'additional years'. (Sorry, my knowledge on pensions is minimal to say the least!)

I have no idea whether USS is in good financial nick. How would I check?

(i) If Salary Sacrifice is available for the AVC it means you not only avoid income tax on your contribution, but also National Insurance. Depending on the salary sacrifice scheme that your employer has, you may even get credited with part of the employer's national insurance contribution. This adds up to such a big advantage that you really need to find out: I suppose "HR" is the place to enquire.

(ii) A USS pension is based on the number of years for which you contribute to the scheme, and on your average salary. "Additional years" means that your money is used to increase the number of years used in the final calculation - so that your pension would be based on, say, 30.5 years rather than 30 you actually worked. The other AVC scheme, with the Pru, looks just like a conventional Defined Contribution pension scheme, except for one nice wrinkle. When you retire you can choose to get all your AVC money out as a tax-free lump sum, in return for accepting a smaller tax-free lump sum than you would otherwise get from the USS scheme; instead you would opt for a bigger monthly pension from USS. This might well work very much to your advantage (and if it didn't, you wouldn't opt for it anyway).

(iii) How to check the nickedness of USS? Perhaps an expert can weigh in here. Years ago there was a scathing article in the FT about how ropey the USS finances were, an article answered by mere bluster from the scheme. Judging by the overhaul of USS since then, the journalist was right and the executives of the scheme were mistaken - untruthful or incompetent, maybe. So given that you can't trust what the scheme says about itself, how to judge? Ahoy, dunstonh, can you enlighten us?

dllive

Thanks kidmugsy - thats really very helpful. I shall discuss further with HR (or Accounts or whoever) next week.

I feel pensions are so unsecure and convoluted given the lifespan of them. I suppose theyre much like any other financial product in that way. No wonder theres such a universal lack of people investing in them. I have such a short term outlook that I really have to force myself to put any money into my pension. I just hope I live to see the day that I benefit from it!

kidmugsy

I've made another comment on USS here.
https://forums.moneysavingexpert.com/discussion/comment/59681641#Comment_59681641

dllive

Hi kidmugsy,

I spoke to the accounts lady. She said that Salary Sacrifice is not possible with AVCs (I think she said it was possible with the final salary option, but not the average salary option that Im on).

I also asked her whether the £298.14 figure that I would receive on retirement would be in today's terms (ie what its worth in today's money) or whatever the equivalent of £298.14 is in 25 years. My thinking being that if its the former, then that may only buy me a few pints! She confirmed that it would be £298.14 in today's money!!! Id hate to think what inflation is going to mean that £298.14 is worth in 25 years time!

This may be a deal breaker - I fail to see the incentives of paying into a pension on these terms! Maybe Id be better putting it into a SIPP which is invested in defensives, or a S&S ISA, or just spending it now on... something.

I dont quite know what Im asking here! I would like to have my mind changed.

dllive

I forgot to say, she did mention that a bit of interest will be added to it over the time between now and age 65 at the retail price index rate. Whether that accounts for much I dont know.

kidmugsy

dllive wrote: »

She confirmed that it would be £298.14 in today's money!!! Id hate to think what inflation is going to mean that £298.14 is worth in 25 years time!

I'm afraid that your question, and maybe her answers, were ill-phrased. I've never found the expression "in today's money" any help at all - much too ambiguous/confusing. I suspect that the correct answer is that you'd get your £298.14 p.a., increased by the rise in the CPI over the interval. That would not be "interest" but inflation-protection. (Are you sure she said "RPI"? USS has given up the use of RPI, saying that it's promise to members is to mimic the index-linking of public scheme pensions.) Anyway, you surely won't make this investment based on my suspicions, so I suppose you'd better ask again. In your shoes I'd ask in writing, requesting an answer in writing. In particular, establish whether the inflation-protection is "capped", that is to say whether they uprate with the CPI or, instead, uprate by CPI or x.y% per annum whichever is smaller. The latter is, in my considered judgement, no bloody good.

A USS webpage says "Full information on the AVC options can be found in the factsheet ‘Increasing your benefits by paying Additional Voluntary Contributions’ ..." but, remarkably, gives no link to the said fact sheet. Dear God!

kidmugsy

Aha, here is the pdf you need.
http://www.uss.co.uk/Guides%20and%20Booklets%20CRB/Guide%20for%20Members%20CRB.pdf

Here are the words on annual inflation-protection:
"USS will match increases in official pensions for the first 5%. If official pensions increase by more than 5%, then USS will pay half of the difference up to a maximum increase of 10%. So, if official pensions increased by 15% or more, USS increases would be 10% in that year."

Note that the promise refers to official pensions - they currently are linked to CPI but perhaps won't always be. Official pensions are ruinously expensive to the public purse and the present bunch of wimps in government has done nothing remotely substantial enough to reform them. Some day a chop at the inflation-protection of those pensions will imply a chop at yours. Mind you, in such circs a government might seize everyone's pension funds anyway, so what the hell?

dllive

Thank for your time on this kidmugsy. Im going back n forth on this, so maybe Ill just compromise and out in half of what I was originally intending to!

The accountant did answer my question by email RE RPI rate and said: "Yes it is just today’s terms – a bit of interest will be added to it over the time between now and age 65 at the retail price index rate but the pension will still be based on the original value of £298 – whatever that will be worth at age 65."