USS Retirement Question

Tarama

Hello 

I know there are many very USS  knowledgeable folks on this forum and I hope you can perhaps look at my situation in a different way, than I am doing so.

I am a member of USS and I requested a retirement quotation for October 2021. The figures for this are below.  I am in the fortunate position whereby I am not subject to actuarial reduction, having transferred into USS from a health service job.  I have a vague plan to retire next summer at age 62 and want to ensure I maximise the USS benefits.

 

1.       October 2021 standard benefits  (RIB)

Total standard pension          £28,315

Total standard lump sum      £85,000

Investment Builder               £130,500

 

2.       Alternative option -  RIB and IB

Maximum tax free lump sum

Per annum pension £28,739

Lump sum £191, 600

 

I want to take the maximum tax free lump sum and think I will have an annual pension of about £30,000 next year – so I am happy with this.  The alternative quote above includes £23,287 from the RIB commuted into annual pension of £610, using a commutation factor of 38.14.13 (this changed last November unfortunately).  

I will continue to build up benefits of about £20,000 into the IB and about £4000 into the RIB lump sum by July 2022. 

 

Is there anything else I can do to maximise my benefits on retirement? 

Many thanks

Tarama  

ussdave

You're right about the commutation factor being changed in a detrimental way.  On that basis I don't think commuting standard lump sum (or IB pot) to annual pension is as attractive as it once was and I would lean towards not doing this.

For option 2 can you change this so that your:

• Annual pension remains at the standard rate of £28,315.
• Your lump sum remains at £191,600
• The remaining £23,287 is transferred out to a separate SIPP that you can draw on normally (25% of which will be tax free).

My understanding of the rules is that this is allowed and it would probably leave you better off than utilising the poor commutation rate that USS now offers. 

As you are in the position of having no early retirement factors to worry about some of the other standard suggestions probably don't apply (transferring more out of your IB into a SIPP to delay drawing your USS pension - which facilitates bridging and reducing ERFs).

One last point - the additional pension you expect to build up should be utilised in the same way as suggested above.  Max your tax free cash, don't commute any IB money into RB benefits and transfer the remaining balance to an alternative SIPP where you'll be able to draw it 25% tax free, the rest taxed at your standard rate.  You'll probably want to withdraw all this before you hit state pension age as you'll start to be knocking on the door of a HR tax rate by then.

kidmugsy

You could check the size of State Pension that you are on course for. Buying extra often proves an excellent investment.

Tarama

ussdave said:

You're right about the commutation factor being changed in a detrimental way.  On that basis I don't think commuting standard lump sum (or IB pot) to annual pension is as attractive as it once was and I would lean towards not doing this.

For option 2 can you change this so that your:

• Annual pension remains at the standard rate of £28,315.
• Your lump sum remains at £191,600
• The remaining £23,287 is transferred out to a separate SIPP that you can draw on normally (25% of which will be tax free).

My understanding of the rules is that this is allowed and it would probably leave you better off than utilising the poor commutation rate that USS now offers. 

As you are in the position of having no early retirement factors to worry about some of the other standard suggestions probably don't apply (transferring more out of your IB into a SIPP to delay drawing your USS pension - which facilitates bridging and reducing ERFs).

One last point - the additional pension you expect to build up should be utilised in the same way as suggested above.  Max your tax free cash, don't commute any IB money into RB benefits and transfer the remaining balance to an alternative SIPP where you'll be able to draw it 25% tax free, the rest taxed at your standard rate.  You'll probably want to withdraw all this before you hit state pension age as you'll start to be knocking on the door of a HR tax rate by then.

Hello USSdave

Interesting name.   

Thank you and yes as you say, commuting lumpsum to pension is rather dire now.  I did not think of transferring this sum (plus what ever else I build up next year) to a SIPP. This sounds a really good idea.

So, as for how this works, the USS website should have the detail about how to do this.  But could anyone briefly explain how this process works.  That would be really helpful to me.  Also ussdave - I imagine I do this when I get my final quote next year (so that I know what figures I am dealing with)?

again thanks - I really appreciate your reply.

Tarama  

Tarama

kidmugsy said:

You could check the size of State Pension that you are on course for. Buying extra often proves an excellent investment.

Hello Kidmugsy

thank you for your suggestion.   I will have a full pension at 62, so no benefit from this.

Again thank you for taking the time to answer me.   This forum is such a help and people are so willing to share their knowledge and insight - invaluable.

Tarama 

ussdave

Tarama said:

ussdave said:

You're right about the commutation factor being changed in a detrimental way.  On that basis I don't think commuting standard lump sum (or IB pot) to annual pension is as attractive as it once was and I would lean towards not doing this.

For option 2 can you change this so that your:

• Annual pension remains at the standard rate of £28,315.
• Your lump sum remains at £191,600
• The remaining £23,287 is transferred out to a separate SIPP that you can draw on normally (25% of which will be tax free).

My understanding of the rules is that this is allowed and it would probably leave you better off than utilising the poor commutation rate that USS now offers. 

As you are in the position of having no early retirement factors to worry about some of the other standard suggestions probably don't apply (transferring more out of your IB into a SIPP to delay drawing your USS pension - which facilitates bridging and reducing ERFs).

One last point - the additional pension you expect to build up should be utilised in the same way as suggested above.  Max your tax free cash, don't commute any IB money into RB benefits and transfer the remaining balance to an alternative SIPP where you'll be able to draw it 25% tax free, the rest taxed at your standard rate.  You'll probably want to withdraw all this before you hit state pension age as you'll start to be knocking on the door of a HR tax rate by then.

Hello USSdave

Interesting name.   

Thank you and yes as you say, commuting lumpsum to pension is rather dire now.  I did not think of transferring this sum (plus what ever else I build up next year) to a SIPP. This sounds a really good idea.

So, as for how this works, the USS website should have the detail about how to do this.  But could anyone briefly explain how this process works.  That would be really helpful to me.  Also ussdave - I imagine I do this when I get my final quote next year (so that I know what figures I am dealing with)?

again thanks - I really appreciate your reply.

Tarama  

The name was chosen after I originally signed up with something I realised was a bit too easily identifiable.  However, I'm reasonably confident that there are many members in the USS pension scheme called Dave

I'll be honest and say I'm not entirely sure regarding the process as I've not been through it.  However, I think your assumption is right.  From what I understand, when you make your final "retirement choices" you can instruct USS to transfer the remaining IB balance to the pension scheme of your choice. 

I would set the SIPP up well in advance and provide these details with as much notice as possible to minimise any delays.  Similarly, you may want to cease any additional pension contributions a month or two before retirement just to ensure that you don't have to wait for these payments to be processed and/or invested before your payments from USS start.  I've not heard about this being an issue for USS but I do remember it being mentioned when discussing LGPS pensions.

Out of interest, do you know what funds your IB monies are held in?  By default I imagine they'll have been moved into low risk funds at this point but if you previously chose a manual investment option you may want to review that and de-risk.

Tarama

Hello ussdave

I am sure there are many Dave's in the USS too, in fact I know quite a lot.

thank you for this information and this all sounds sensible.  I will take account of it all.

In terms of funds I transferred out of the riskier funds about 2 years ago into the 'Do it for me'.  But interestingly a few months ago the do it for me began to put 10% into their growth fund.  They did not tell me (they may have others) but I contacted them when this happened.  Their answer was often people do not stick to their USS TRA but keep going, so this was to kept some growth in their investments.   

again thanks Tarama     

slithy_tove

Hello - a recent USS retiree here.

[i] want to ensure I maximise the USS benefits

You haven't explained what you mean by this.  There is indeed a limited degree to which you can fiddle with the income/lump-sum balance as you have spotted.  But you really need to tell us your goals more specifically before anyone can advise (common parlance meaning only) you. Two of your possible actions are in direct contradiction to each other (taking maximum lump sum, and commuting lump sum to income), and a clear view of what you are trying to achieve may help with the decision making.

Questions to ask are

1. Do you really need a large lump sum now?  If you have a mortgage to pay off, it may be best to take only what you need as a lump sum. 
   
2. Remember you don't need to take your IB benefits when you retire. You could leave some or all in place - just like a SIPP.  If you might want a lump sum later rather than on retirement you can do that from the IB.
   
3. How is your health?  Are you expecting a long or short retirement?
   
4. Do you have ambitions of leaving a pension amount to your dependents/descendants or are you planning to spend the lot?
5. Do you want a constant, guaranteed income throughout your retirement or are you prepared to tolerate some fluctuation? Could you take the RIB (ie the DB) income, and supplement it with some drawdown from the IB (the DC component)?
   
6. In particular do you care that your income may increase by £9000+inflation in 5 years time by the state pension (but do check the govt website to see how much you will get).  One strategy might be to use some of your IB funds in the first 5 years to top up, and decrease when your state pension kicks in.

I am inferring (guessing really) from your numbers that you are already doing the most important thing to maximize your pension which is to contribute as much as you can possibly afford while you are still earning.

And I might also comment - and invite USSdave to explain - what benefit would there be by transferring the IB (DC) component to a SIPP? USS offers the full range of drawdown options and a good range of investment options. You already have an IB fund you can treat just like a SIPP but with the difference that you don't pay any charges!  (OK, the range of investment choices is restricted, but I suspect consistent with the OP's comfort level, based on this thread.)

ussdave

slithy_tove said:

Hello - a recent USS retiree here.

[i] want to ensure I maximise the USS benefits

You haven't explained what you mean by this.  There is indeed a limited degree to which you can fiddle with the income/lump-sum balance as you have spotted.  But you really need to tell us your goals more specifically before anyone can advise (common parlance meaning only) you. Two of your possible actions are in direct contradiction to each other (taking maximum lump sum, and commuting lump sum to income), and a clear view of what you are trying to achieve may help with the decision making.

Questions to ask are

1. Do you really need a large lump sum now?  If you have a mortgage to pay off, it may be best to take only what you need as a lump sum. 
   
2. Remember you don't need to take your IB benefits when you retire. You could leave some or all in place - just like a SIPP.  If you might want a lump sum later rather than on retirement you can do that from the IB.
   
3. How is your health?  Are you expecting a long or short retirement?
   
4. Do you have ambitions of leaving a pension amount to your dependents/descendants or are you planning to spend the lot?
5. Do you want a constant, guaranteed income throughout your retirement or are you prepared to tolerate some fluctuation? Could you take the RIB (ie the DB) income, and supplement it with some drawdown from the IB (the DC component)?
   
6. In particular do you care that your income may increase by £9000+inflation in 5 years time by the state pension (but do check the govt website to see how much you will get).  One strategy might be to use some of your IB funds in the first 5 years to top up, and decrease when your state pension kicks in.

I am inferring (guessing really) from your numbers that you are already doing the most important thing to maximize your pension which is to contribute as much as you can possibly afford while you are still earning.

And I might also comment - and invite USSdave to explain - what benefit would there be by transferring the IB (DC) component to a SIPP? USS offers the full range of drawdown options and a good range of investment options. You already have an IB fund you can treat just like a SIPP but with the difference that you don't pay any charges!  (OK, the range of investment choices is restricted, but I suspect consistent with the OP's comfort level, based on this thread.)

A valid question.  The simple answer is that when I initially read up on USS drawdown I was a bit put off by the limited amount of withdrawals per year before charges are incured.  Realistically this isn't a problem (I think you get 3 per year?) but due to my reaction when I first read about it I put the option to the back of my mind and promptly forget it even existed...

What you've suggested sounds like a very sensible approach to me, especially if you continue to not be charged fees for holding funds.

edit: to be clear, I'm only referring to the point about leaving the funds in USS rather than transferring to another SIPP.  The reasons for not commuting lump sum into additional RB benefits have already been discussed above.

Also - question for anyone in the know.  Once you've drawn to the maximum lump sum, presumably any benefits left in USS IB for further drawdown are crystalised?  If so, I imagine that whether or not you transfer to another SIPP or leave the money in USS IB to drawdown later my earlier point about 25% tax free on remainder was wrong.

Tarama

slithy_tove said:

Hello - a recent USS retiree here.

[i] want to ensure I maximise the USS benefits

You haven't explained what you mean by this.  There is indeed a limited degree to which you can fiddle with the income/lump-sum balance as you have spotted.  But you really need to tell us your goals more specifically before anyone can advise (common parlance meaning only) you. Two of your possible actions are in direct contradiction to each other (taking maximum lump sum, and commuting lump sum to income), and a clear view of what you are trying to achieve may help with the decision making.

Questions to ask are

1. Do you really need a large lump sum now?  If you have a mortgage to pay off, it may be best to take only what you need as a lump sum. 
   
2. Remember you don't need to take your IB benefits when you retire. You could leave some or all in place - just like a SIPP.  If you might want a lump sum later rather than on retirement you can do that from the IB.
   
3. How is your health?  Are you expecting a long or short retirement?
   
4. Do you have ambitions of leaving a pension amount to your dependents/descendants or are you planning to spend the lot?
5. Do you want a constant, guaranteed income throughout your retirement or are you prepared to tolerate some fluctuation? Could you take the RIB (ie the DB) income, and supplement it with some drawdown from the IB (the DC component)?
   
6. In particular do you care that your income may increase by £9000+inflation in 5 years time by the state pension (but do check the govt website to see how much you will get).  One strategy might be to use some of your IB funds in the first 5 years to top up, and decrease when your state pension kicks in.

I am inferring (guessing really) from your numbers that you are already doing the most important thing to maximize your pension which is to contribute as much as you can possibly afford while you are still earning.

And I might also comment - and invite USSdave to explain - what benefit would there be by transferring the IB (DC) component to a SIPP? USS offers the full range of drawdown options and a good range of investment options. You already have an IB fund you can treat just like a SIPP but with the difference that you don't pay any charges!  (OK, the range of investment choices is restricted, but I suspect consistent with the OP's comfort level, based on this thread.)

 

Hello Slithy tove 

In answer to your question – re maximising USS?

 

My plan was to have £29,000 to £30,000 pa pension, which is adequate for my needs.  I will achieve this next year.  I entered USS with a TUPE agreement to retire after 55 years with no actuarial reduction in my USS pension and I am well beyond that age now.  Also, I will have full state pension at 66 years, so I have never really factored this in, but nice to have this. 

 

I work between two HEIs so have contributed approximately £25,000 pa into the IB for the last year and will continue with that 2021/22.  I am buying back years – with both HEIs.

 

I am mortgage free but helping my daughter who has just bought her first house – with deposit and now with interiors.  I would like to help her – perhaps add an extension in the future.  I have some plans to upgrade my own house – costs for this will be about £20,000.  After this I do not have any particular plans for the money except to feel relief at having got to this stage and with a good sum of money in the bank.

 

So this year my USS quote revealed there will be an excess of approx. £23,000 after this taking the max TFLS, which they commuted from the RIB using the awful factor of 38.1413 so giving me an additional £610 pension pa.   So ussdave suggested taking this from USS IB into a SIPP.   Drawing down 25% and then taking sums taxed at BR.  I had not considered this and think it is a good idea.

 

You have suggested that I could potentially still take the 25% TFLS or another sum, but then leave what is left in the IB – crystallised and then use drawdown.  Again I had not considered this but it is something to think about.  AS you say we currently do not pay management fees etc in the IB so it is potentially a sound place to leave the additional funds.  So any further thoughts about this would be welcome.

 

My health at present is good and I feel like I want to spend the money I have after living a very thrifty life and always worrying about finances. So I like the idea of having a good sum to draw on if need be.  I also plan to return to work in one of the HEIs after retirement – I like this work a lot and have many lovely colleagues and friends there.

 

Ussdave has replied to you re the SIPP – so lots of things for me to think about.

 

Thanks Tarama.

MPLMPL

ussdave said:

Also - question for anyone in the know.  Once you've drawn to the maximum lump sum, presumably any benefits left in USS IB for further drawdown are crystalised?  If so, I imagine that whether or not you transfer to another SIPP or leave the money in USS IB to drawdown later my earlier point about 25% tax free on remainder was wrong.

From the benefit modeller on the USS site "What if my Investment Builder is more than the maximum tax-free cash?

You can either convert the excess amount of funds above the HMRC limit into additional pension, or alternatively you can leave the excess funds invested. If you leave the funds invested you can withdraw them any time you like in the future and, provided you have not exceeded your available Lifetime Allowance, 25% of each withdrawal will be tax-free and the remainder will be subject to income tax (based on current HMRC rules)."