Would I be a fool not to take the USS match?

rubuhoeikanaika

Hi all,

I'm enrolled in the USS pension scheme; my contributions are 8% salary sacrifice. (I'm a basic-rate taxpayer). They've just rolled our a less generous version of the scheme, but have made it slightly better in that I can opt to contribute 1% into a defined-contribution (not benefit! thanks bowlhead) section, and my employer will match it.

There's a variety of funds on offer, but with no track record yet. Given the tax relief and employer match, would I be a fool not to take the 1% match and possibly choose one of the more aggressive/risky funds?

Cheers!

bowlhead99

rubuhoeikanaika wrote: »

I can opt to contribute 1% into a defined-benefit section, and my employer will match it.

To avoid confusion on terminology, I think you mean you can contribute 1% into a defined- *contribution* section and your employer will match it. That money gets put into a variety of funds like you say, but the ending value isn't guaranteed. So it's the contribution, not the ending benefit, which is being 'defined' up front.

Given the tax relief and employer match, would I be a fool not to take the 1% match

Generally, yes. If you put in £100, they will put in £100 and the government will let you off some of this year's tax bill. Even ignoring the tax break, you have instantly doubled your money. So you could then afford to lose 50% to high charges and bad investment decisions at the worst possible times, without losing a penny of your own money. So the choice is take the free money or don't.

Taking it would not make you a fool. Whereas ignoring the opportunity, might, unless you have something amazing to do with your 1% that will make it instantly double.

and possibly choose one of the more aggressive/risky funds?

Just because the employer is giving you a cash match (which sounds like it is part of the compensation for worsening the terms of your main scheme while still wanting you to get a good overall pension) does not mean you should chose a risky fund and gamble it. It is not to be thought of as "free money, easy come easy go".

Sure, if you are a long way from needing to take the pension and you already have decent defined benefit provision, you can maybe afford to take more risks than someone who was older, and people with 20+ years to retirement generally have more aggressive investments than older people because they have more time to ride out the ups and downs. But that's nothing to do with whether the investment was funded by themselves or via an employer match. The employer will still give you the free money by matching your 1% in a more conservative fund choice, so don't let the thought of "free money" make you go too crazy. Invest it in whatever fund you'd invest your own cash.

If you are not far from pension age and considering early retirement, it would perhaps make sense to have this DC pension be invested more conservatively with the goal of accessing it earlier and avoid paying the large penalties incurred by drawing the main DB one early.

rubuhoeikanaika

Thanks for this! You are right of course, it is defined contribution, bit of a thinko on my part.

I am reasonably far from retirement (in my mid-30s), but I've only been contributing to a pension for 2 years (before that I was a PhD student overseas).

The defined benefit section is pretty good -- not as generous as it used to be, but still combined with the state pension should provide a comfortable retirement.

The reason I'm tempted to put it in an aggressive fund is that we have a decent amount of cash savings (in the tens of thousands, partially earmarked for a house deposit down the road), and I was intending to take out an equities-heavy stocks and shares ISA. But this looks like a better deal, and in any case for foreign tax reasons I may not be allowed to use a stocks and shares ISA. So since I had intended to take out some 'high risk play money' investments, I'm thinking this may be the best way to do it?

rubuhoeikanaika

OK that's done, I chose the USS Global Equity fund, because I'm a bit pessimistic about the UK in the long run. As you say, its value could drop 50% and I'd still come out ahead!

It's about 90% BlackRock MSCI world fund, the rest in their emerging market equity fund.

swindiff

Its a bit of a no brainer, I did the match plus an extra 3%. So an extra 5% going into my DC pension pot, 4% from me and 1% from my employer. Like you I decided to go for the Global equity fund. Also all investment fees are subsidised by the employer.

I look at it like this, any money I can afford to put into this fund is immediately effectively earning 20% as you get tax relief on it. Where else can you put your money and get a 20% return?

dunroving

+1

no-brainer for 99.9% of the population; double your money.

kidmugsy

rubuhoeikanaika wrote: »

would I be a fool not to take the 1% match

********Yes**************