Maximising USS pension

AlanP_2

Why take the tax free amount from your DC pot (invested) and put it in to an ISA (invested)? If both investments are the same what's the benefit / purpose?

If you think HMRC will tinker with the TFLS rules you might do it, but difficult to think of any other reason.

PJM_62

AlanP_2 said:

Why take the tax free amount from your DC pot (invested) and put it in to an ISA (invested)? If both investments are the same what's the benefit / purpose?

If you think HMRC will tinker with the TFLS rules you might do it, but difficult to think of any other reason.

This is where my lack of knowledge / understanding kicks in   So I'm very grateful for all advice.
I guess I was thinking move as much tax free cash from DC pot to my Vanguard LS funds in ISA , as once in the ISA it will always be free from tax and quick and easy to access.  And when I'm 60, as well as my DB pension I'll be getting a small RAF pension. These combined will push me over the income tax threshold. So I thought anything I take from the DC will be taxed?
My thinking is, for simplicity, I'd like to be getting DB/guaranteed pensions from USS(56) + RAF(60) + SP(67), and everything else is in my Fidelity S&S ISA (Vanguard LS40 + LS60).  Very happy to change my thinking thou , if there's a better way    

garmeg

PJM_62 said:

AlanP_2 said:

Why take the tax free amount from your DC pot (invested) and put it in to an ISA (invested)? If both investments are the same what's the benefit / purpose?

If you think HMRC will tinker with the TFLS rules you might do it, but difficult to think of any other reason.

This is where my lack of knowledge / understanding kicks in   So I'm very grateful for all advice.
I guess I was thinking move as much tax free cash from DC pot to my Vanguard LS funds in ISA , as once in the ISA it will always be free from tax and quick and easy to access.  And when I'm 60, as well as my DB pension I'll be getting a small RAF pension. These combined will push me over the income tax threshold. So I thought anything I take from the DC will be taxed?
My thinking is, for simplicity, I'd like to be getting DB/guaranteed pensions from USS(56) + RAF(60) + SP(67), and everything else is in my Fidelity S&S ISA (Vanguard LS40 + LS60).  Very happy to change my thinking thou , if there's a better way    

That is my thinking as well. Drawdown my needs plus £25k and after tax I have £20k to stick in my ISA.

As I have exactly crystallised LTA (plus still have some uncrystallised funds) I need to make sure that LTA test at age 75 does not bite on the crystallised pot. Using the ISA will help.

AlanP_2

I don't think LTA is an issue for PJM based on what they have said so don't have that issue to manage.

Whilst anything from your DC may be taxable after your RAF pension starts so you should ideally maximise what you take out of the DC pot prior to that and make full use of your personal allowance at least.

You can take a "tax free" element with each taxable withdrawal if you don't take the 25% upfront e.g. Withdraw £10,000 a year - £2.5k tax free and £7.5k taxable.

I think what I would so is set up a s/sheet with your desired annual income per year and add columns for each source and play around with different mixes to see what works best (allowing for relevant tax as required).

So say you wanted £25k a year and were happy to pay a "consistent" amount of tax each year:

Year 1/2/3/4 = DB + DC (with 25% of that being tax free)

Year 5 -12 = DB + RAF + smaller DC drawdown (with 25% being tax free) 

Year 13 onwards = DB + RAF + SP + even smaller DC drawdown (with 25% being tax free)

+Any excess / shortfall make use of ISA.

PJM_62

Thanks Alan. Thats really helpful. When i see it like that it makes complete sense.
Because the USS has been a rocky ship these last few years , something in the back of my head wants me to fairly quickly get my money out of the USS DC pot and into my Fidelity ISA.  I'm not so worried about the DB side of it, as I assume its covered by the Government's pension protection scheme.  

ussdave

PJM_62 said:

Thanks Alan. Thats really helpful. When i see it like that it makes complete sense.
Because the USS has been a rocky ship these last few years , something in the back of my head wants me to fairly quickly get my money out of the USS DC pot and into my Fidelity ISA.  I'm not so worried about the DB side of it, as I assume its covered by the Government's pension protection scheme.  

Your DC pot is not going to be impacted by the USS funding issues as it's completely separate.  The DB benefits may be impacted - most likely future accrual will be slashed and/or made more expensive (or even moved to pure DC).  Your current DB benefits could be impacted should USS fall into the PPF.

swindiff

The tax free lump sum for USS pension is also calculated against the "value" of the DB pension.  20 x annual pension + DB lump sum (3 x annual pension).
So as an example if you had an annual pension of £20k, the DB pension would be valued at £460k (£20k x 20) + (£20k x 3)
Let's say you have £100k in the DC part of the pension this gives a total "value" of £560k, 25% of which can be taken as tax free lump sum, so £140k.
Compare this to just the DB lump sum of £60k plus the £25k (25%) from the DC part of the pension which would only be £85k
I am not sure if you can defer taking the tax free cash if you want to take advantage of how it is calculated against the entire pension DB+DC, but I may be wrong
If this is the case I will be taking my tax free lump sum in its entirety and feeding it into ISA's for the wife and I over a few years.

PJM_62

swindiff said:

The tax free lump sum for USS pension is also calculated against the "value" of the DB pension.  20 x annual pension + DB lump sum (3 x annual pension).
So as an example if you had an annual pension of £20k, the DB pension would be valued at £460k (£20k x 20) + (£20k x 3)
Let's say you have £100k in the DC part of the pension this gives a total "value" of £560k, 25% of which can be taken as tax free lump sum, so £140k.
Compare this to just the DB lump sum of £60k plus the £25k (25%) from the DC part of the pension which would only be £85k
I am not sure if you can defer taking the tax free cash if you want to take advantage of how it is calculated against the entire pension DB+DC, but I may be wrong
If this is the case I will be taking my tax free lump sum in its entirety and feeding it into ISA's for the wife and I over a few years.

Thanks @swindiffthats great to hear. (and well explained 👍) . 
I'll definitely be doing what you suggest. Seems like a no brainer ?
So .. after the initial max TFLS is taken out (and put into ISA) , how does it work for any future tax to be paid on whats left in the DC pot . ?  If the annual income from DB+DC is under income tax threshold (12.5k ?) would that still mean no tax to pay?

swindiff

Yes if you are under the current tax free allowance you would pay no tax on pension income.  You will likely start having to pay a bit when state pension kicks in.
Will you have anything left in the DC pot? I know when I have done my calculations (using the modeler) and they are similar to the example I posted, there will be no DC pot left as anything over the TFLS can be used to increase your annual DB pension.

ussdave

swindiff said:

The tax free lump sum for USS pension is also calculated against the "value" of the DB pension.  20 x annual pension + DB lump sum (3 x annual pension).
So as an example if you had an annual pension of £20k, the DB pension would be valued at £460k (£20k x 20) + (£20k x 3)
Let's say you have £100k in the DC part of the pension this gives a total "value" of £560k, 25% of which can be taken as tax free lump sum, so £140k.
Compare this to just the DB lump sum of £60k plus the £25k (25%) from the DC part of the pension which would only be £85k
I am not sure if you can defer taking the tax free cash if you want to take advantage of how it is calculated against the entire pension DB+DC, but I may be wrong
If this is the case I will be taking my tax free lump sum in its entirety and feeding it into ISA's for the wife and I over a few years.

You're right - you can't defer taking the tax free amount and still get this benefit.  I think you possibly can defer it but in that case the tax free element is calculated against just the DC pot.