Pension planning in early 40s - DB scheme changes

taka

I’m currently an active USS member. Given the DB v DC uncertainty going forwards I’d like a bit of help to formulate a better plan for retirement.

My situation: Single, early 40s, no kids and an intermediate tax payer (live & work in Scotland). I’ll probably be part of USS going forwards due to my job type. Mortgage will end in approx 10 years, no other debts. I have sufficient cash saving (mix of cash ISAs / reg savers / interest bearing current accounts for emergencies and shortish term major spending etc and will be saving a little to this to replace any major spends in the next few years.

I have several bits of pensions accrued while working for the same employer (at different grades). Pension paid into via salary sacrifice.

1. £2341pa - DB pension. (employer’s scheme for lower grades – in 2 parts, both deferred).
2. £3941pa - USS DB pension (part is deferred and part is from my current active membership). This is based on the standard scheme payout at NRA which would also give me a tax free sum of 3 times this amount on retiral. This DB pension would be reduced by approx 4% for each year I take this early. Retirement age will increase with state pension age.
3. A little over 1k - USS DC pension pot. Paying in a voluntary 1% which my employer matches (This match will cease as of April 2019 I think). Same retirement age would apply as the DB part so couldn’t be taken early on its own. Could be used along with the standard 3xpension amount above to take the allowed 25% tax free lump sum at retiral without impacting the DB pension and or be used as needed in retiral.
4. Whatever remains of the state pension by the time I get to (the ever-increasing!) retirement age! Checking what I’ve contributed so far show a further 14 years NI contributions needed to pay for full pension under the current rules.

I would need a minimum amount of 12k minimum (16-18k to be more comfortable and have more fun money!) per annum in retirement (in today’s money). This is what I happily live on now.

Things I need a helping hand to get my head round…

• If USS does become a DC only scheme going forwards (worst case senario) then roughly what would I need to invest to retire on a pension I can actually LIVE on not just exist on.
• Contributions to DC part of USS would be via salary sacrifice so would save on the NI costs. Currently all the fees (for all but the riskiest fund options) are covered by employer subsidy but who know if this will continue after next year let alone until I retire.
• I’d like to retire several years early (if affordable!) as I’d rather not work till I’m 67 or 68.
  • DB part of the USS pension has approx 4% pa penalty for taking the DB bit early but no clue how this will change as the state pension age (and thus scheme retirement age) increases. DC bit can't be accessed any earlier than the DB bit.
  • Pension 1 above looks like it may not be reduced by as much if taken early but I need to double check this. Not sure if I could access this at an earlier age than the USS one or not as it was accrued while working for the same (and current!) employer – just at a lower grade where USS was not an option .
  • Could also pay into some other pension scheme eg a SIPP too which could be used to plug any gaps if I wanted to retire early and not be forced to take a reduced DB pension. Would need to pay my own fees/costs (and make sure I contact HMRC or complete a tax return to get the 21% Scottish tax not just the standard 20% tax back).

• S&S ISA – Should probably invest in one going forwards for any potential medium-long term savings (to prevent the erosion of these by inflation in a cash savings account or equivalent). May or may not be need to access before I retire – if not could also be used to help plug any early retirement funding gap too.

I have approx a £5k lump sum and £500 a month I can invest for my longer term future to a combo of the above USS DC / SIPP / S&S ISA. (My contributions need to be flexible as my job funding is grant based is mostly fairly short term (6-12-18 months) grants these days.)


I’ve tried to get my head round investing but my eyes glaze over, and I lose the will to live. I’m even just struggling with all the terminology let alone deciding what to actually invest in! I don’t really know where to start. Help!!

Also any tips on any calculators / modellers out there I can use to model some of my possible choices a bit further? The current USS pension modellers don’t seem to take into account the 65 to 66/67/68 increases in retirement age, presume the DC costs continue to be subsidised and that the DB bit remains the same (which it won’t) so aren’t really helpful. My head feels like it is going to explode!


Thanks in advance! :beer:

AnotherJoe

You've laid it out neatly and in good detail, I suggest you take that to an independent financial adviser and pay for a couple of hours of their time to get advice.

taka

Thank you!!

Would an IFA be interested in this now given USS is a mess with no-one having a clear idea of what will happen with it in the next few years?

• Future accruals after april 19 remaining current DB scheme will be on a cost sharing basis for a time (35% employee, 65% employer) Actual costs to members for this to be anounced this/next month...
• ... This would be until the results of the joint expert panel are in and agreed to by all sides (including the Pension regulator) which may take a further year or more after April 19 to actually be implimented?

Paying USS an ongoing chunk of my spare money (which would probably have been the IFA advice a couple of years ago!) will probably be the best for part of my spare cash but who knows what this could give me! :rotfl:

The remaining possible SIPP / S&S ISA investment options would only involve part of the £500 a month (and lump sum?) so not worth a whole lot compared to some people's investments! I'd rather not need to pay an IFA every 3 yrs to update my plans whenever USS have a reevaluation and change the scheme again!

I need a stiff drink!! :eek: ... and a crystal ball! :rotfl:

bluenose1

I am in USS and in the last year have increased my contributions massively to take advantage of salary sacrifice. However bit more straightforward decision for me as I am 52 so in theory can take my DC money out from 55.
Appreciate really difficult for you to decide how to invest for the future.
In your position I would consider increasing my DC Contributions, as surely even if they did raise age to access pensions it won't be above 60.
I have done a simplified spreadsheet working out what my DC total pot should be and just divided it by no of years I have to live on it.

If they do abolish DB scheme then I would assume that your current contributions will have approx the same return for the D.C. scheme, albeit it as a lump sum rather than a guaranteed annual pension without any consideration to the effects of the stock market.
Sorry don't have answers to your questions, the good thing is you are considering it now so should have time to plan to retire at 60.
Let's just hope the DB scheme continues.

kidmugsy

taka wrote: »

an intermediate tax payer

(i) What does that mean?
(ii) Is your pension tax relief in the hands of Wee Nicola or of the Chancellor of the Exchequer?

P.S. If you google "wee nicola" you get some unfortunate girl called Nicola Wee.

taka

bluenose1 wrote: »

If they do abolish DB scheme then I would assume that your current contributions will have approx the same return for the D.C. scheme, albeit it as a lump sum rather than a guaranteed annual pension without any consideration to the effects of the stock market.
Sorry don't have answers to your questions, the good thing is you are considering it now so should have time to plan to retire at 60.
Let's just hope the DB scheme continues.

Don't think the DC only plan would be remotely as good going forwards, hence part of the reason for the objections and the ensuing strikes. It may continue as part DB for a bit longer but will prob cost more and accrue less into it after 2019. _pale_

kidmugsy wrote: »

(i) What does that mean?
(ii) Is your pension tax relief in the hands of Wee Nicola or of the Chancellor of the Exchequer?

Yep I'm scottish and earn over 24k so I'm in the intermediate band for tax rather than the basic 20% I would be in the rest of the UK. See this and this. I *think* this means I'll get this 1% of extra tax paid back in my pay for any SIPP contributions paid but only if I actively tell the HMRC I'm doing so (or complete a tax return). Not the easiest of things to fathom and I'm not 100% sure I've got this right... More confusion! :wall:Just what I need! :rotfl:

Scottish intermediate tax band payers paying into a pension from net pay could well miss out getting this 1% of tax paid back if they don't tell HMRC or do a tax return. It is not adjusted for automatically at least for this tax year...

kidmugsy wrote: »

P.S. If you google "wee nicola" you get some unfortunate girl called Nicola Wee.

:rotfl:

kidmugsy

In your shoes I might wait and see whether the question of what the government is to do about basic and higher rate tax relief is resolved, or until USS's future is sorted out, whichever comes first. Even then it might be worth waiting for the second uncertainty to be cleared up.

Meantime keep paying the DC 1% so you harvest your employer's contribution. My own guess is that a good wheeze may prove to consist of saving into an S&S ISA now, and then removing the capital and contributing it to a pension if the tax relief rules become more generous for someone on your income.

taka

Thanks kidmugsy.

Dazed_and_confused

Scottish taxpayers can definitely get an additional 1% tax relief for the current tax year. Providing sufficient 21% tax has been paid of course.

https://www.gov.uk/tax-on-your-private-pension/pension-tax-relief

MPLMPL

A little over 1k - USS DC pension pot. Paying in a voluntary 1% which my employer matches (This match will cease as of April 2019 I think). Same retirement age would apply as the DB part so couldn’t be taken early on its own. Could be used along with the standard 3xpension amount above to take the allowed 25% tax free lump sum at retiral without impacting the DB pension and or be used as needed in retiral.

As a USS member I've been looking ahead 10 or so years with the aim of retiring at 60 (if not before). Reading the USS retirement factsheet it looks as though you can take the Investment Builder from 55 before retiring or taking the DB part. If I am reading it correctly, you have the option to transfer out the Investment Builder part (DC) to another pension provider, which I assume would be a SIPP.
"Accessing before retirement by transferring out: At any point you may transfer out your money invested in the USS Investment Builder to another pension arrangement. The employer subsidy of investment management charges will not apply for any funds once they have been transferred out.*"
"*Furthermore, any money transferred out will be off set against death-in-service or incapacity benefits should they become payable at a later date. Incapacity and death-in-service benefits are calculated by reference to your full salary, rather than salary restricted to the salary threshold for any period."
"*If you are looking at this option, you should be aware that if you start to draw your USS Investment Builder benefits (defined contribution (DC) benefits) under one of the flexible access products introduced by the government in April 2015 (e.g. UFPLS, Flexible Access Drawdown), your future DC contributions will be subject to a restricted annual allowance, known as the Money Purchase Annual Allowance (MPAA)."

I assume the death in service benefits refers to the IB component that is contributed by the employers for salary over the £57k threshold not your additional voluntary contributions.

I've currently upped my contributions to the investment builder to 25% of my salary to take advantage of salary sacrifice (20% tax + 12% NI). I will probably make this transfer out of the DC portion when I retire as it gives me the option to defer the DB part to reduce the actuarial reduction for going early. Even if I don't defer my DB portion, switching out clearly gives a much bigger choice of funds and gives more flexibility in how I use it.

kidmugsy

MPLMPL wrote: »

I've currently upped my contributions to the investment builder to 25% of my salary to take advantage of salary sacrifice (20% tax + 12% NI). I will probably make this transfer out of the DC portion when I retire as it gives me the option to defer the DB part to reduce the actuarial reduction for going early.

That sounds a good plan. It may be wise to use sal sac to the max while it remains available for pension contributions. (If a government re-aligns tax relief will it seize the chance to abolish pension sal sac?)

But are you subject to the OP's constraint?

taka wrote: »

My contributions need to be flexible as my job funding is grant based is mostly fairly short term (6-12-18 months) grants these days.