pension help - final salary AVC (USS)

dax42

Hi all,

I'm contributing to USS and am currently in the final salary section. This scheme is coming to an end next year, which means our 'final' salary is the salary at that point, not at retirement age.

Since I am fairly new in this career (age 33), I'm hoping my salary will continue to rise past this point. Along with the changes to USS, they are removing the option to buy additional years of service through AVCs. If I want to do that, I'd have to set that up within the next months. So I'm trying to weigh the benefits of contributing something now - what are the advantages? Here's what I've worked out:

According to the USS modeller, if I contribute a lump sum of £4320 (net) now, this would buy me an extra £150 per year extra pension and a lump sum of £450. This means I would have to live for 25 years past the age of 65 to get my money back out. The monetary benefit of making this extra payment thus seem pretty small (I hope to live to be 90, but somehow don't expect to get much older than that, who knows...).

Benefits I can see are:
- those £150 will be inflation adjusted by USS, at least up to 5% of inflation and to some extent also past that
- the amount of money I will get is defined and thus fairly secure (although the changes to USS now don't fill me with a lot of confidence for the future of the scheme)

Are those benefits enough for me to make that extra contribution? Have I missed anything? What would you do?

kidmugsy

dax42 wrote: »

According to the USS modeller, if I contribute a lump sum of £4320 (net) now, this would buy me an extra £150 per year extra pension and a lump sum of £450. This means I would have to live for 25 years past the age of 65 to get my money back out.

I know it's hard to resist, but it's daft to calculate the payback time by ignoring inflation when one great advantage of a USS FS pension is that it has a link to CPI that is more generous than some other schemes offer.

Your big decision is tricky. Pro: the opportunities for someone your age to buy DB pension rights will get scarcer and scarcer (unless you become a government employee).

Con: USS has been shipping water for some years now; Lord knows what its future will be. All DC probably - but will the FS section survive you and your widow? If not much of your inflation protection will vanish under the PPF - and that's assuming that the PPF could survive a monster scheme like USS getting into serious trouble.

Do I understand correctly that when the FS section closes you will become a member of the CARE section? On that understanding:-

My own instinct would be to assume that I shall eventually have large punts on USS surviving (through the FS and CARE sections) and therefore add no more. But I can see that others might reasonably have a different instinct.

Southend1

Surely USS couldn't go into PPF unless every participating employer went bust? I think it more likely a gradual shift to DC only is the way it will end up. Although when interests rates rise it may provide a reprieve.

Pincher

Sounds fair enough to me, since it's index linked.


The idea that somebody will be increasing your annuity according to index linking rules 50 years from now, is almost a religious act of faith.


Nevertheless, I did put in about £7,000 into an AVC in my 30s, and it's worth about £20k now. As the FS scheme has now been closed to new members for 15 years, and I still have 13 years to go, I don't know what pimpled youth will be answering the phone when I ring up to buy extra years. I am certainly expecting the idiot to say, "I'm sorry, you only have one option, because I don't know how to press button B."

dunroving

dax42 wrote: »

Hi all,

I'm contributing to USS and am currently in the final salary section. This scheme is coming to an end next year, which means our 'final' salary is the salary at that point, not at retirement age.

Since I am fairly new in this career (age 33), I'm hoping my salary will continue to rise past this point. Along with the changes to USS, they are removing the option to buy additional years of service through AVCs. If I want to do that, I'd have to set that up within the next months. So I'm trying to weigh the benefits of contributing something now - what are the advantages? Here's what I've worked out:

According to the USS modeller, if I contribute a lump sum of £4320 (net) now, this would buy me an extra £150 per year extra pension and a lump sum of £450. This means I would have to live for 25 years past the age of 65 to get my money back out. The monetary benefit of making this extra payment thus seem pretty small (I hope to live to be 90, but somehow don't expect to get much older than that, who knows...).

Benefits I can see are:
- those £150 will be inflation adjusted by USS, at least up to 5% of inflation and to some extent also past that
- the amount of money I will get is defined and thus fairly secure (although the changes to USS now don't fill me with a lot of confidence for the future of the scheme)

Are those benefits enough for me to make that extra contribution? Have I missed anything? What would you do?

I am also in USS and was interested to see your post. I am not sure how to multi-quote, so have just bolded a couple of sections I wanted to respond to.

I was surprised by your first bolded statement - I was not aware of this. It doesn't affect me because I don't plan on going up for further promotion before retiring, and I am currently at the top of my scale. I would bet most of my colleagues are unaware of this - and I haven't heard of any great rush to submit promotion materials before this deadline, which indicates to me that it's not widely recognised. Does it mean (a) no adjustment to FS based on promotions after the deadline and also that (b) FS is based on the increment point someone is on at the deadline date?

Re: Your second point, as you will know, AVCs can either be made by a lump sum or a contract for monthly AVCs. Have you considered also setting up a monthly AVC contract before the deadline?

Sorry, I'm not really answering your questions, but in general, I think the pattern of change in pension schemes will be towards defined contribution and career-average schemes, so anything linked to a typical gold-plated FS scheme will usually beat whatever comes next.

kidmugsy

Southend1 wrote: »

Surely USS couldn't go into PPF unless every participating employer went bust? I think it more likely a gradual shift to DC only is the way it will end up. Although when interests rates rise it may provide a reprieve.

Aye, but one falling domino will knock over a couple more. I can't really see it surviving as an inverted pyramid sitting on Trinity, Cambridge.

kidmugsy

dunroving wrote: »

I was surprised by your first bolded statement - I was not aware of this. ... I would bet most of my colleagues are unaware of this - and I haven't heard of any great rush to submit promotion materials before this deadline, which indicates to me that it's not widely recognised. Does it mean (a) no adjustment to FS based on promotions after the deadline and also that (b) FS is based on the increment point someone is on at the deadline date?

I was rather shocked when I first heard it too, on this forum (from hyubh, I think). It seems to me to be a bit of a breach of faith, but apparently it's a common procedure when FS sections close. I suppose it's a pointed reminder of what a pickle many of these schemes are in.

Southend1

I don't ink the scheme is in anywhere near as bad shape as it's made out to be. It's more to do with the valuation rules and the current extremely low interest rates. The government and employers are taking advantage of the situation to kill off the last few decent pension schemes before they start looking healthier again.

Keithmanchhester

Just one thing, when you said the "final salary" is at the time the FS scheme ends (31 March 2016) not when you retire, you aren't quite correct. The "final salary" at that date will be increased annually by CPI (up to a threshold). So if your added years will be under the FS umbrella, then they will grow.
I'm in my late 50s and thus in the fortunate position of being close to retirement, but I have never regretted paying my added years AVC. I understand, however, your uncertainties under the new scheme and its long term future. My guess, for what that is worth, is that after the next valuation in 2020 it will switch to a DC scheme for new members.

kidmugsy

I've looked at this
http://www.uss.co.uk/Documents/SchemeChangesanupdateAugust2015.pdf

"If you are now paying regular instalment added years AVCs, it will be assumed that you will continue to make payments. However your added years AVC benefits will be based on your pensionable salary at 31 March 2016. You will have the right to stop paying such AVCs at any time."

I suppose an argument for starting AVC additional years contributions now is that the the opportunity to start them will vanish next Spring, but an already started contribution can continue thereafter, while you can change your mind and stop contributing whenever you like.

So my inclination would be to consider monthly contributions rather than a lump sum. I'd also consider making the matched 1% contribution to the DC section, since that would be harvesting the keenly sought "free money".

Moreover, if you have a reasonable expectation of higher pay in the not-too-distant future by virtue of promotion, I'd consider NOT starting AVC contributions while you are in the final salary section, where your pension rises would be limited to CPI subject to capping, but instead starting them once you are in the CRB section.

P.S. You could even split your risks: start monthly contributions while in the FS section, then later consider stopping them, and later yet restarting as a member of the CRB section if promotion is achieved.

Pincher

Some food to feed the paranoid.

I know this lecturer, who was lecturing away at a London University, and was forced into early retirement because they wanted to minimise their pension liability, and salary roll. The more seniority you have, the more you are entitled to.

At my old company, they made a big attempt to get us to switch away from the Final Salary scheme, by offering a sweetener top-up. Something like, the transfer value of my FS scheme was £15k, and I will end up with a company DC scheme worth £18k with say Scottish Widows. Some people switched, I didn't. And then the redundancies started, I was out the door by 2000. Did the people who stayed on the old FS scheme get put on the black list first?

The people who did real work all wanted me to stay, but the Human Resource department just sees how much you cost them.

If you cling onto the benefits of the FS scheme too hard, they have ways of prying it out of your fingers.