USS - General discussion

Time2Go_25

Just trying to understand my USS pension prior to pressing the button on early retirement.

So at 65, I've got (figures rounded) pension of £9800, lump sum of £29400 and then £48000 in IB.

If I choose to take the lot, I get £10258 with a tax free lump sum of £68400, so it appears that I can have everything without paying tax, but if I just take the DC it says 25% tax free with tax to pay on the rest.

Am I missing or misunderstanding something as I can't see any reason why I'd therefore not want to take everything.

MarlowMallard

If you "take the lot", your annual pension is valued by HMRC at 20* annual. You can then take 6.66x annual tax-free, since 6.66 is 1/4 of 26.66. 

So, if you took the 9800 you would have a lump sum of 65k and about 12k left in the IB, of which 25% is tax-free whenever you take it.  The "take the lot" converts the 12k into extra 450 annual pension plus 3k lump approx.  If you took the 9800+65k,  then took the remaining 12k a bit later you would be taxed 20% of 9k i.e. get 65k + another 10.2k, but the pension would be down 450 p.a.    

So, yes it is generally advantageous to take out as much as you can from IB when you start the annual pension. 

Barralad77

Barralad77 said:

Hello all,

For those who received their annual statement last week, can I ask a question about the figure given for your Lump Sum Allowance. It states that “You’ve used £xxx,yyy of the Lump Sum Allowance of £268,275 at the end of tax year 2024-25” but my figure looked too high, so called USS for clarification. The first person I spoke to said that it reflected the LSA I will have used when I reach 66 assuming I continue to make contributions being made as of 31/03/25. I pointed out that that’s not how it was worded and suggested that that information was arguably useless (I want to know how much I’ve used up ‘now’, not when I turn 66 - especially in light of the fact that I’ll be retiring at 60). She said that I could work out the figure I wanted by using the calculator on My USS. So I went in search of said calculator but in vain. I called a second time and the explanation given this time was that the figure quoted in the statement could be higher than 25% of the value of my pension if I took money out of the Investment Builder in smaller chunks (?). I think I know how to calculate the correct LSA as of today but find it frustrating that USS seem to get even the simple things wrong. Does anyone else have difficulty getting sense out of USS? I’m getting worried as I’ll be taking my pension in a few months’ time and fear they will !!!!!! something up. I did submit an enquiry using the online portal, but after I’d submitted I got the onscreen message “Your enquiry couldn’t be submitted at this time. Please try again later“. Another thing that doesn’t work, then….

An update for anyone that may be interested in the above. After getting nowhere over the phone with USS about the LSA quoted in my annual statement I asked for someone to tell me in writing how it’s been calculated by them. 

In summary, this is what they have now told me:

[1] contrary to the wording on the statement I have not actually used any of my LSA as I’ve not taken any tax-free cash.
[2] the LSA quoted is simply the 3x annuity plus whatever is in the IB
[3] the LSA quoted on the statement is”the value you would use if you had hypothetically taken all of your benefits from USS at that date” (I.e., 31/03/25).

My response to the above is as follows:
[1] Yes, I’m fully aware of that.
[2] That makes no sense as the maximum you can take tax-free isn’t simply the sum of those two numbers.
[3] That’s simply not true (unless the total of my benefits is around £400,000 more than it is according to their very own method of calculating those benefits).

So when, on the statement, it says “you’ve used…” that’s not true as you’ve probably ‘used’ nothing. When they say that this is what you would have ‘hypothetically’ used if you’d taken your benefits at that point that’s also not true. Getting to the truth seems difficult to achieve.

Anyway, I’ve lost any hope of getting any sense out of them.

pine_shelter

I've been a member of USS for a long time, and I'm starting to think about retirement in 6-8 years. I'm trying to understand my annual statement and the numbers spit out by the benefits calculator.  This thread has been very useful, much more so than the USS website.

One thing that has been said a number of times on this forum is that when taking DB and DC benefits together, you can take a combined TFLS up to a maximum of 6.66 x the value of your annual pension.  Where does this number come from?  I can find no other references to it.  And how does this provision intersect with the max TFLS of £268,275?  For example, what happens if 6.66 x your annual pension is more than that figure (i.e. if your AP is more than £40,282)?

MarlowMallard

pine_shelter said:

One thing that has been said a number of times on this forum is that when taking DB and DC benefits together, you can take a combined TFLS up to a maximum of 6.66 x the value of your annual pension.  Where does this number come from?  I can find no other references to it.  And how does this provision intersect with the max TFLS of £268,275?  For example, what happens if 6.66 x your annual pension is more than that figure (i.e. if your AP is more than £40,282)?

When you trigger the DB annual pension, this is treated by HMRC as a hypothetical "pot" of 20 times annual pension, as if you'd bought a whole-life annuity with a DC pot.   Then 6.66 is 25 percent of 26.66 , hence the number. 
 If your AP is more than £40.3k then the TFLS is capped at £268k max  (and if you've already taken TFLS elsewhere, that also subtracts from the £268k,  the £268k is a lifetime limit. )   

pine_shelter

MarlowMallard said:

When you trigger the DB annual pension, this is treated by HMRC as a hypothetical "pot" of 20 times annual pension, as if you'd bought a whole-life annuity with a DC pot.   Then 6.66 is 25 percent of 26.66 , hence the number.  

Thanks for the clarification about the lifetime limit.  Apologies if I am being thick here, but where does the 26.66 number come from?  

PJM_62

best explanation of the 6.66 I saw , was here

MarlowMallard

pine_shelter said:

Thanks for the clarification about the lifetime limit.  Apologies if I am being thick here, but where does the 26.66 number come from?  

The 26.66 is the "total pot" you're accessing, i.e. sum of 20*AP plus the lump of 6.66*AP .   
The lump must not exceed 25% of that "total pot", so you can write an equation (actually an inequality)
                    LS <= 0.25* (20*AP + LS) , 
 so rearranging 0.75*LS <= 5*AP ,  so LS <= 6.66* AP   

pine_shelter

MarlowMallard said:

The 26.66 is the "total pot" you're accessing, i.e. sum of 20*AP plus the lump of 6.66*AP .   
The lump must not exceed 25% of that "total pot", so you can write an equation (actually an inequality)
                    LS <= 0.25* (20*AP + LS) , 
 so rearranging 0.75*LS <= 5*AP ,  so LS <= 6.66* AP   

I see.  Thanks very much for explaining.  One more question.  Wouldn't the "total pot", i.e. the total value of the pension, include not only the 20*AP and the LS, but also the funds remaining in the DC pot after the LS was paid out?

pine_shelter

pine_shelter said:

Wouldn't the "total pot", i.e. the total value of the pension, include not only the 20*AP and the LS, but also the funds remaining in the DC pot after the LS was paid out?

Nevermind.  I think I found the answer to my own question. It seems that the pension commencement lump sum is a feature of the DB part of the scheme and the DC part is not relevant for computing the "applicable amount", as HMRC calls it in their manual:

The applicable amount for an arising entitlement to a scheme pension under a defined benefits arrangement

Paragraph 2C schedule 29 Finance Act 2004

Where a scheme pension is provided under a defined benefits arrangement or a collective money purchase arrangement

The applicable amount is

(A + (B x C) - D) / 4

A= the amount of the lump sum to be paid

B= 20 (the relevant valuation factor as per Section 276 Finance Act 2004)

C= the amount of the pension which will be payable to the member in the 12 months beginning with the day the member becomes entitled to the pension

D= Deduction applied only where A or C represents rights where there is a disqualified credit