USS lump sum and commutation factor question

rhubarbtart

Newly signed up (but very long time lurker), so please be nice!

OH recently turned 60 recently and, due to buying added years in USS, has over 41 year service accrued. Recent quotation from USS offers a standard lump sum of £95k with pension of £31.7k, no lump sum with max pension of £36.6k or max lump sum of £181k with pension of £27.2k. Commutation factor is 19.4120. OH in good health and our decision which way to go has no impact on spouse's pension (it's 50% of the standard offer). We've read across various articles and forums that the general advice for defined benefit schemes is to take the standard offer or higher pension (rather than higher lump sum). However, the commutation factor is higher than we thought it would be and we are also thinking that it might be an idea to go with the max lump sum to keep him out of the higher tax band.....We've no pressing need for the lump sum, so we would splurge a little and invest most. Any views? We will likely seek professional advice from an IFA, but would appreciate a reality check so I don't come across as a complete idiot!

xylophone

We've read across various articles and forums that the general advice for defined benefit schemes is to take the standard offer or higher pension (rather than higher lump sum).

Yes, but it is "horses for courses" and very dependent on personal circumstances.

The commutation factor is fairly generous ( even prodigal compared with some:D) and as you say, now is the time to enjoy the long holidays, dream car, home improvements etc.

You could put £30000 between you into NISAs and enjoy tax free income/capital gains, and continue to do this year after year.

You might wish to make potentially exempt transfers to your children etc?

kidmugsy

rhubarbtart wrote: »

OH recently turned 60 recently and, due to buying added years in USS, has over 41 year service accrued. .... it might be an idea to go with the max lump sum to keep him out of the higher tax band.

Before you do anything, read up on Allocation and see if it would suit you as an alternative way of avoiding Higher Rate tax.

Another possibility would be to view deferring his eventual State Retirement Pension as a way of getting some extra pension at, roughly speaking, the same commutation rate. (That's an estimate: it's not law yet, as far as I know.) So if taking the lump sum proved unsuitable you've got a way of partly reversing it.

You could go through an exercise of seeing how you can diversify the financial risks of his early death vs his long survival. (The emotional risks we can do nothing about, alas.)

xylophone

eventual State Retirement Pension

The single tier legislation has now been passed - some indications here

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181237/single-tier-pension-fact-sheet.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/210299/single-tier-valuation-contracting-out.pdf

jem16

rhubarbtart wrote: »

However, the commutation factor is higher than we thought it would be and we are also thinking that it might be an idea to go with the max lump sum to keep him out of the higher tax band.....We've no pressing need for the lump sum, so we would splurge a little and invest most.

Unless your husband will continue to work in some capacity, the highest pension of £36.6k would not be in higher rate tax anyway.

RichandJ

I do see a bit of a disconnect here between the usual advice not to take cash, or at leastt max cash (often based on the carp public sector comm rates) and my actual experience as an administrator (of sorts) at a Third Party Administration firm.

90+% in my experience do take the max cash available. We don't ask (or provide financial advice - not authorised) why people are doing this, although our standard letters do say that the income foregone may not be made up by the income available from the PCLS.

I assume most people take it to pay off mortgages/other debt & be "debt free", possibly not realising the true value of the pension given up.

I'd say CFs over 20 at 65, and we have a few, are "worth it", but anything under may not be. Really seems to depend on people's post retirement attitude to risk which appears to be zero in most cases. It's a dilemma.

Dunnit

Of the three offers, as you say, there is little point in going into the higher rate tax band when your OH draws his state pension. Take the lower offer and top up your pension to make sure you are maximising the £10k tax free allowance. I am sure a luxury car supplier and cruise company can relieve you of the rest. In another 20 years he will be 80 and you can only cheat father time for so long. Do it now