USS - General discussion

Barralad77

pine_shelter said:

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

That’s the calculation for the DB element of USS but if you have money in the IB then you also have a DC element (in other words, it’s a hybrid pension that contains both a DB and a DC element). Going back to your earlier question, the DC element does contribute to the ‘applicable amount’ as it pertains to this hybrid (assuming someone has money in the IB) arrangement. The calculation outlined in the HMRC site seems to assume that it’s a DB-only pension (I.e.. no linked DC element).

As ever, I stand to be corrected if someone knows better!

pine_shelter

MarlowMallard said:

pine_shelter said:

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)?

 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. )   

If I set a high enough retirement age, the USS benefit calculator shows my AP as being more than £40.3K.  In this case, it seems that there is no particular tax advantage to buying additional annual pension by reverse commutation, since I would already have the maximum allowable TFLS.  Nevertheless, the calculator suggests taking a higher AP.  This seems wrong.  Is there any reason it should be suggesting this in cases where the maximum TFLS is already available?  Some people may want to do reverse commutation for their own reasons, but that is a separate matter.

Barralad77

pine_shelter said:

MarlowMallard said:

pine_shelter said:

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)?

 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. )   

If I set a high enough retirement age, the USS benefit calculator shows my AP as being more than £40.3K.  In this case, it seems that there is no particular tax advantage to buying additional annual pension by reverse commutation, since I would already have the maximum allowable TFLS.  Nevertheless, the calculator suggests taking a higher AP.  This seems wrong.  Is there any reason it should be suggesting this in cases where the maximum TFLS is already available?  Some people may want to do reverse commutation for their own reasons, but that is a separate matter.

The calculator is blind to limits on TFLs etc. (it has to be, as there is no way of knowing what other pensions anyone has or what changes to LTA and so on might be ‘round the corner). It simply works out what the maximum is from a mathematical perspective and leaves it up to the individual to work out whether they’ve breached the allowance limits. I think you’re expecting far too much from the USS calculator.

pine_shelter

Barralad77 said:

The calculator is blind to limits on TFLs etc. (it has to be, as there is no way of knowing what other pensions anyone has or what changes to LTA and so on might be ‘round the corner). It simply works out what the maximum is from a mathematical perspective and leaves it up to the individual to work out whether they’ve breached the allowance limits. I think you’re expecting far too much from the USS calculator.

It's true that the calculator cannot know individual circumstances, but it should know that no one can take a TFLS larger than £268K.  It should not, by default, suggest taking a lump sum larger than that. 

It also should not suggest reverse commutation as a tax minimization strategy in cases where it knows that strategy cannot work.  

That last point is the more important one because of the calculator's lack of transparency about the RC and why it is doing it.  It's easy enough to see that your USS lump sum is above the limit, and indeed the calculator gives a warning that the lump sum is above the limit.  But it is vary hard to know what is going on with the estimate that includes RC and it is far from obvious that the tax benefit presumably motivating this suggestion does not exist for a clearly defined group of USS members.

Barralad77

pine_shelter said:

It's true that the calculator cannot know individual circumstances, but it should know that no one can take a TFLS larger than £268K.  It should not, by default, suggest taking a lump sum larger than that. 

I’m not sure that’s correct.

https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/lump-sum-allowances-for-pensions#:~:text=Useful%20tools-,How%20much%20can%20I%20take%20from%20my%20pension%20tax%2Dfree,rather%20than%20regular%20income)%20and

pine_shelter

Another issue with the USS benefits calculator is that it seems to completely ignore added years AVCs for the DB part of the scheme.  Is that correct?

I'm trying to decide whether I should continue paying for those added years.  It is a much worse value proposition now that the cost has risen along with my present salary, but the benefit is frozen, linked with my lower salary in 2016.  Someone complained to the Pensions Ombudsman about this situation but the ruling was in favour of USS.  The main remaining advantage is that, according to the scheme rules, this benefit is revalued with CPI and no cap, because I signed the AVC contract before the cap came in.  

I have 6 years remaining on my added years AVC contract.  The total cost remaining will be about £50,000.  If there is no inflation after I retire, I will recoup that investment after 22 years.  By my calculations, if inflation after retirement runs at 2% I will recoup it after 18 years.  At 4%, 16 years.  It's really not a great deal, but it's a bit of a hedge against high inflation.

I do worry that USS could change the scheme rules to impose the cap on these benefits.  Is that something they could do, legally?

Barralad77

pine_shelter said:

Another issue with the USS benefits calculator is that it seems to completely ignore added years AVCs for the DB part of the scheme. 

Not sure exactly what you are looking for but the second calculator - the one where you use the info provided on a quote - does allow you to add MPAVC figures. 

pine_shelter

Added years AVCs are an entirely different beast from MPAVCs.  In the old USS final salary DB scheme, you used to be able to sign a contract to acquire additional years of service so that you would have the maximum of 40 years when you retired at 65.  In exchange you agreed to pay a percentage of your current salary.  When they broke the link with final salary in 2016, the value of what you got was frozen, while the cost continued to rise with your salary.

My USS annual statement shows the current value as an annuity of the added years I have already paid for, revalued for inflation up to the previous March.  The calculators do not seem to take any notice of this sum.  When I first started using the calculator, I was very confused: I thought that the final annuity figure which silently includes reverse commutation was actually a figure that included my added years AVCs, since the amounts are similar.

d6fs1l

pine_shelter said:

If I set a high enough retirement age, the USS benefit calculator shows my AP as being more than £40.3K.  In this case, it seems that there is no particular tax advantage to buying additional annual pension by reverse commutation, since I would already have the maximum allowable TFLS.  Nevertheless, the calculator suggests taking a higher AP.  This seems wrong.  Is there any reason it should be suggesting this in cases where the maximum TFLS is already available?  Some people may want to do reverse commutation for their own reasons, but that is a separate matter.

I am trying to understand what you are referring to here.

Are you referring to the modeller taking some DC savings to increase the annual pension in a situation where the lump sum is above the Lump Sum Allowance? It is true that it does seem to do that automatically, and while the modeller does clearly flag that you have exceeded the LSA it may not be obvious on first glance that it has also taken some DC savings. However, it is easy enough to reverse that at step 3 ("Take less DC savings").

I am not sure that it does this for tax reasons, but even if it does it is not obvious to me that this is necessarily disavantageous? What strategy do you have in mind for the DC savings?

Maybe I have completely misunderstood you.

pine_shelter

d6fs1l said:

Are you referring to the modeller taking some DC savings to increase the annual pension in a situation where the lump sum is above the Lump Sum Allowance? It is true that it does seem to do that automatically, and while the modeller does clearly flag that you have exceeded the LSA it may not be obvious on first glance that it has also taken some DC savings. However, it is easy enough to reverse that at step 3 ("Take less DC savings").

I am not sure that it does this for tax reasons, but even if it does it is not obvious to me that this is necessarily disavantageous? What strategy do you have in mind for the DC savings?

Maybe I have completely misunderstood you.

It is my understanding that reason the modeller suggests taking DC savings to increase the annual pension is absolutely for tax reasons.  Doing so increases the total value of the DB pension, as calculated by HMRC.  This in turn increases the amount of the DB commencement lump sum you can take, since that is limited to 25% of the total value of the DB pension.  The sneaky part is that the funds for this increased tax-free lump sum, though it is linked to the size of DB pension, can be supplied from the DC pot.  The paradox is that decreasing the size of your DC pot by spending some of it to buy more annual pension actually makes the DC pot more valuable to you, because you can then take more of it tax-free.  I may be wrong about all this!  If so I hope someone else can clarify.

My complaint is that the modeller suggests doing this even when the size of your annual pension is already large enough to make it possible to take the entire maximum lump sum of £268K.  In this case, buying more annual pension does not help to increase your tax-free lump sum.

The consensus on this thread seems to be that, in the absence of this tax advantage for the lump sum, the rate USS charges you to convert DC funds to more annual pension is not very competitive compared to buying an equivalent annuity, but I haven't looked into that myself.