USS Retirement Question

Tarama

bluenose1 said:

Tarama said:

bluenose1 said:

MPLMPL- just checking you know that anything you take out of your IB is 25% tax free/ 75% taxed.
Not sure if I am misunderstanding what you are saying.  

“If you take a cash payment from a defined contribution (DC) scheme like the Investment Builder, it will trigger the MPAA. This is the limit you can pay into any DC scheme each year and still get tax relief. It applies to all DC schemes of which you’re a member and any that you join in the future.

The MPAA is currently £4,000, so once you’ve taken a cash payment, any contributions above this amount paid by you and/or your employer(s) in a tax year, into any DC arrangement will be subject to tax charges.

Once triggered, the MPAA applies for life. The benefits you build up in the Retirement Income Builder are not affected by the MPAA as it is the defined benefit (DB) section of the scheme.

You should consider this carefully, when deciding whether to take a cash payment.”

Hello Bluenose 1

checking - is this current pensions legislation not solely a USS rule?

thanks Tarama

The MPAA is UK legislation not USS. However many other  pension schemes let you just take out only the 25% out tax free so doesn’t affect the MPAA. 

Whereas for every cash withdrawal from your IB scheme it is 25% tax free and 75% taxed. Therefore trigger the MPAA.

It is really confusing so be careful if you think you may want to contribute more than £4,000 in the future.
I would consider living off my DB lump sum rather than using my IB if I wanted to work in the future.

Hello Bluenose 

thanks - I am not sure what you mean by this

Whereas for every cash withdrawal from your IB scheme it is 25% tax free and 75% taxed. Therefore trigger the MPAA.

Does the MPAA only trigger if you have cash in the IB and then take a withdrawal?  

I do plan to take a large portion of my TFLS from the IB.   So I guess this rules out future contributions into the IB if I take up some more work with a HEI, after retirement next year?  

However from what you say here I can contribute to the DB - RIB   USS section. 

Based on the information I have, if I do not commute any £ left after my max TFLS is worked out next year, into pension at retirement, I will still have about £50,000 in the IB. So what options does this give me?  For instance what is the best way to withdraw this?  

thanks Tarama

NedS

Tarama said:

Hello Bluenose 

thanks - I am not sure what you mean by this

Whereas for every cash withdrawal from your IB scheme it is 25% tax free and 75% taxed. Therefore trigger the MPAA.

Does the MPAA only trigger if you have cash in the IB and then take a withdrawal?  

I do plan to take a large portion of my TFLS from the IB.   So I guess this rules out future contributions into the IB if I take up some more work with a HEI, after retirement next year?  

However from what you say here I can contribute to the DB - RIB   USS section. 

Based on the information I have, if I do not commute any £ left after my max TFLS is worked out next year, into pension at retirement, I will still have about £50,000 in the IB. So what options does this give me?  For instance what is the best way to withdraw this?  

thanks Tarama

Generally, MPAA is only triggered if you take taxable income from a DC scheme. Taking a TFLS, or taking DB income does not trigger the MPAA, but take 1 penny of taxable income from a DC scheme and the MPAA is triggered. I can see no reason why this would be any different for the USS scheme, but others may be able to better advise you on the USS scheme specifics.

By the way, triggering the MPAA does not limit future contributions to a DB pension, only future contributions to DC schemes.

Tarama

NedS said:

Tarama said:

Hello Bluenose 

thanks - I am not sure what you mean by this

Whereas for every cash withdrawal from your IB scheme it is 25% tax free and 75% taxed. Therefore trigger the MPAA.

Does the MPAA only trigger if you have cash in the IB and then take a withdrawal?  

I do plan to take a large portion of my TFLS from the IB.   So I guess this rules out future contributions into the IB if I take up some more work with a HEI, after retirement next year?  

However from what you say here I can contribute to the DB - RIB   USS section. 

Based on the information I have, if I do not commute any £ left after my max TFLS is worked out next year, into pension at retirement, I will still have about £50,000 in the IB. So what options does this give me?  For instance what is the best way to withdraw this?  

thanks Tarama

Generally, MPAA is only triggered if you take taxable income from a DC scheme. Taking a TFLS, or taking DB income does not trigger the MPAA, but take 1 penny of taxable income from a DC scheme and the MPAA is triggered. I can see no reason why this would be any different for the USS scheme, but others may be able to better advise you on the USS scheme specifics.

By the way, triggering the MPAA does not limit future contributions to a DB pension, only future contributions to DC schemes.

Hi Neds

Thanks for this -  I came across this USS information entitled 

Taking cash from your Investment Builder pot (UFPLS)

which I will study carefully.

Tarama 

slithy_tove

Like other posters, I was also initially confused by the ability to use the IB funds to enhance the PCLS, as very similar in outcome to taking benefits from a DC scheme.  But the correct way to understand this is to apply the rules and legislation in an algorithmic fashion, rather than attempt to reason from the principles behind them.

My understanding is that this does NOT qualify as taking flexible benefits from the DC scheme under the legislation, and therefore does not. if the rules are followed, trigger the MPAA. Instead it is a feature of the USS pension scheme rules, which of course have been approved by the regulator.  If this seems like a loophole, that could be countered by noting that taking IB benefits this way is really NOT flexible at all.  You have exactly one opportunity to do it at the time you take your RIB (DB) benefits.

But to check the value you get from this it is wise to use the USS website modellers. Plugging in some example numbers suggest that for a constant annual pension, adding in £10000 of IB funds achieves almost £10000 in additional lump sum. 

This just leaves the issue of how to invest your excess lump sum - a nice first-world problem to have,

Tarama

slithy_tove said:

Like other posters, I was also initially confused by the ability to use the IB funds to enhance the PCLS, as very similar in outcome to taking benefits from a DC scheme.  But the correct way to understand this is to apply the rules and legislation in an algorithmic fashion, rather than attempt to reason from the principles behind them.

My understanding is that this does NOT qualify as taking flexible benefits from the DC scheme under the legislation, and therefore does not. if the rules are followed, trigger the MPAA. Instead it is a feature of the USS pension scheme rules, which of course have been approved by the regulator.  If this seems like a loophole, that could be countered by noting that taking IB benefits this way is really NOT flexible at all.  You have exactly one opportunity to do it at the time you take your RIB (DB) benefits.

But to check the value you get from this it is wise to use the USS website modellers. Plugging in some example numbers suggest that for a constant annual pension, adding in £10000 of IB funds achieves almost £10000 in additional lump sum. 

This just leaves the issue of how to invest your excess lump sum - a nice first-world problem to have,

Hello Slithy-tove

in my situation I estimate I will have an additional £23,000 left after taking my max TFLS on retirement.  In my USS projection USS have commuted this sum into  additional pension from the RIB section - to give me an additional pension of £610.  The commutation factor here is 38.1413  (lump sum into pension)!!

My initial question was this is rubbish, so is there a more cost effective way to use this cash?

I of course agree it is a first world problem.

Tarama          

slithy_tove

Tarama said:

in my situation I estimate I will have an additional £23,000 left after taking my max TFLS on retirement.  In my USS projection USS have commuted this sum into  additional pension from the RIB section - to give me an additional pension of £610.  The commutation factor here is 38.1413  (lump sum into pension)!!

My initial question was this is rubbish, so is there a more cost effective way to use this cash?

I would be tempted to leave it in the IB, and invest in the "growth" fund (higher risk, but this is "extra" money on top of a guaranteed baseline income). Then there are a few options

• Simply draw down flexibly to provide some additional income.  The  conventional (but arguable) wisdom is to take 4%/year which would give £920/year.  Clearly significantly better than £610, though at higher risk and not index-linked. This would of course be taxable at your marginal rate. Depending on investment performance this could continue indefinitely.
  
• Your income will increase by £9000-ish when you hit state pension age at 66. Draw down at £5500-ish per year between 62-66, evening out the sharp change in income at 66, but exhausting the fund at that point.
  
• Simply leave it as an investment which you could draw on in future, or which your daughter could inherit down the line if you don't.
  

Slithy

Tarama

slithy_tove said:

Tarama said:

in my situation I estimate I will have an additional £23,000 left after taking my max TFLS on retirement.  In my USS projection USS have commuted this sum into  additional pension from the RIB section - to give me an additional pension of £610.  The commutation factor here is 38.1413  (lump sum into pension)!!

My initial question was this is rubbish, so is there a more cost effective way to use this cash?

I would be tempted to leave it in the IB, and invest in the "growth" fund (higher risk, but this is "extra" money on top of a guaranteed baseline income). Then there are a few options

• Simply draw down flexibly to provide some additional income.  The  conventional (but arguable) wisdom is to take 4%/year which would give £920/year.  Clearly significantly better than £610, though at higher risk and not index-linked. This would of course be taxable at your marginal rate. Depending on investment performance this could continue indefinitely.
  
• Your income will increase by £9000-ish when you hit state pension age at 66. Draw down at £5500-ish per year between 62-66, evening out the sharp change in income at 66, but exhausting the fund at that point.
  
• Simply leave it as an investment which you could draw on in future, or which your daughter could inherit down the line if you don't.
  

Slithy

Hello Slithy

thank you for this and this is indeed what i will do when I retire - leave this £ in the IB.  I then have to consider how to access it and you have outlined 3 options how to manage this IB cash.  I will think carefully about these options.  

I have been in contact with my uni pensions department and they have clarified it is possible to do this and when I request my final USS retirement quote I can ask for this option to be included.  

Tarama

PJM_62

FYI

I just had a letter back from USS answering a question I had. In it, it was highlighted to me that
"If you intend to retire on or after 1 April 2022, the option to convert your IB savings into additional RIB pension will no longer be available."

ussdave

PJM_62 said:

FYI

I just had a letter back from USS answering a question I had. In it, it was highlighted to me that
"If you intend to retire on or after 1 April 2022, the option to convert your IB savings into additional RIB pension will no longer be available."

That's interesting.  As has been discussed, it wasn't exactly an attractive option anymore but it seems like a shame that it will be removed entirely.

PJM_62

Agreed. The IB>Pension commutation rate seemed to be set as a deterrent.
I'll be happy with a good chunk of my IB being used towards the max TFLS.
Then using UFPLS withdrawals to take the remaining IB, 25% tax free each time.