USS - General discussion

uss_hamish

Unless I'm much mistaken you cannot turn DC savings into extra annual pension. Reverse commutation only ever applies to the 3xAP lump sum.

swindiff

That is correct. You used to be able to but they changed it several years ago.

pine_shelter

Interesting! I wonder if HMRC had a word with USS.  This may finally explain something I could not figure out about the modeller. I never understood how it decided exactly how much extra AP it would suggest to buy in the final step.  But it seems it will suggest reverse commuting the whole 3xAP.  Then you take the full amount of your TFLS from the DC pot.  

Thanks -- that's super helpful.

Barralad77

The calculator gives you - in the first instance - the standard pension and if you then select the ‘take both the DB and DC’ option it defaults to the maximum TFLS calculation. Given that the maximum TFLS is 6.667xAP it reverse-commutates as much of the 3xAP is it can in order to increase the AP and thus maximise the TFLS. Put another way, if it didn’t do this then it wouldn’t be showing you the max TFLS.  I’m pretty sure that’s as complex as it gets. Anything ‘in between’ is available via playing around with the TFLS and DC-remaining sliding scales.

ussdave

Barralad77 said:

The calculator gives you - in the first instance - the standard pension and if you then select the ‘take both the DB and DC’ option it defaults to the maximum TFLS calculation. Given that the maximum TFLS is 6.667xAP it reverse-commutates as much of the 3xAP is it can in order to increase the AP and thus maximise the TFLS. Put another way, if it didn’t do this then it wouldn’t be showing you the max TFLS.  I’m pretty sure that’s as complex as it gets. Anything ‘in between’ is available via playing around with the TFLS and DC-remaining sliding scales.

I need to get round to working out if it's ever worth taking the reverse-commutation option.  I always assumed not (due to the poor conversion rate) but I wonder if it is if you have sufficient money in your IB.

pine_shelter

Thanks to everyone for the explanations!  I'm finally starting to understand what the modeller is doing.  My main complaint is this.  Let's say you have £41K of AP and £400K in the IB. Now 6.667 * £41K =  £273K.  So you can already take the maximum lump sum, and doing reverse commutation will not help you in that respect.  When you choose to take all of your benefits, the modeller will show this (assuming an age-dependent RC factor of 17):

1. My Projection

Annual pension: £41K

Tax-free lump sum: £123K

Investment builder: £400K

3. My Options

Annual pension:  £48.2K (= £41K +  £7.2K ( = £123K / 17)  )

Tax-free lump sum: £321K (= £48.2K * 6.667)

DC savings left: £79K (= £400K - £321K)

The modeller does give a vaguely worded warning under section (1) about the combined value of the TFLS and DC savings exceeding HMRC limits, but the output is highly misleading in several ways:

• It implies that you can take a TFLS of £321K if you do reverse commutation: there is no warning about  HMRC in section (3) of the output.
• It implies that unless you take option (3) with full reverse commutation, you can only take a TFLS of £123K, whereas you can actually take the full £268K, leaving £255K (= £400K + £123K - £268K) in the IB pot.  This should be presented to the user as an option.
• It implies that you can only take RC of your entire 3 * AP amount or none at all.  It would be much more helpful for the modeller to figure out how much extra AP you need to buy via RC in order to maximize TFLS up to the HMRC limit of £268K.

The complete lack of transparency about what the modeller is doing is the fundamental problem.  Members should not have to reverse engineer it to figure out their options.

Barralad77

ussdave said:

Barralad77 said:

The calculator gives you - in the first instance - the standard pension and if you then select the ‘take both the DB and DC’ option it defaults to the maximum TFLS calculation. Given that the maximum TFLS is 6.667xAP it reverse-commutates as much of the 3xAP is it can in order to increase the AP and thus maximise the TFLS. Put another way, if it didn’t do this then it wouldn’t be showing you the max TFLS.  I’m pretty sure that’s as complex as it gets. Anything ‘in between’ is available via playing around with the TFLS and DC-remaining sliding scales.

I need to get round to working out if it's ever worth taking the reverse-commutation option.  I always assumed not (due to the poor conversion rate) but I wonder if it is if you have sufficient money in your IB.

Found an old note I’d made for my myself a while back. Your circumstances will doubtless be different but here’s where I got to: [hope my maths was correct!]
———————————————————————————————————
Reverse Commutation - worth it?

Factor is 20.97.

Meaning I get £47.70 in AP per £1,000 given up from IB.

Which looks like 4.77%

But after tax (@20%) that £47.77 is only worth £38.22

Equivalent to net return of 3.82%

Discounting annual lift, would take 26 years to recover the £1,000 given up. Probably closer to 20 years factoring in annual uplift, but then the £1,000 would be - hopefully - giving a decent return left invested.

Could I get more than net 3.82% from interest in ISA or from investments? Maybe, maybe not.

——————————————————————————————————

I did a number of permutations and it always came ‘round to being equivalent to between 3.5-4.0% net equivalent return. Concluded that I would probably only do RC if I wanted/needed to maximise the TFLS but neither applies in my case.

Barralad77

pine_shelter said:

Thanks to everyone for the explanations!  I'm finally starting to understand what the modeller is doing.  My main complaint is this.  Let's say you have £41K of AP and £400K in the IB. Now 6.667 * £41K =  £273K.  So you can already take the maximum lump sum, and doing reverse commutation will not help you in that respect.  When you choose to take all of your benefits, the modeller will show this (assuming an age-dependent RC factor of 17):

1. My Projection

Annual pension: £41K

Tax-free lump sum: £123K

Investment builder: £400K

3. My Options

Annual pension:  £48.2K (= £41K +  £7.2K ( = £123K / 17)  )

Tax-free lump sum: £321K (= £48.2K * 6.667)

DC savings left: £79K (= £400K - £321K)

The modeller does give a vaguely worded warning under section (1) about the combined value of the TFLS and DC savings exceeding HMRC limits, but the output is highly misleading in several ways:

• It implies that you can take a TFLS of £321K if you do reverse commutation: there is no warning about  HMRC in section (3) of the output.
• It implies that unless you take option (3) with full reverse commutation, you can only take a TFLS of £123K, whereas you can actually take the full £268K, leaving £255K (= £400K + £123K - £268K) in the IB pot.  This should be presented to the user as an option.
• It implies that you can only take RC of your entire 3 * AP amount or none at all.  It would be much more helpful for the modeller to figure out how much extra AP you need to buy via RC in order to maximize TFLS up to the HMRC limit of £268K.

The complete lack of transparency about what the modeller is doing is the fundamental problem.  Members should not have to reverse engineer it to figure out their options.

I agree that the ‘max TFLS’ figure would be better as a simple multiple (6.667) of the standard pension but it is what it is. I doubt they would want to include both ‘max’ calculations (one with, and one without, RC) as that would doubtless lead to even greater confusion and more questions. Luckily for us, this forum allows us to get ‘round the lack of transparency. Not that I’m excusing the issues folk have with the USS site, but at least here we can usually work out way through the murk.

ussdave

Barralad77 said:

ussdave said:

Barralad77 said:

The calculator gives you - in the first instance - the standard pension and if you then select the ‘take both the DB and DC’ option it defaults to the maximum TFLS calculation. Given that the maximum TFLS is 6.667xAP it reverse-commutates as much of the 3xAP is it can in order to increase the AP and thus maximise the TFLS. Put another way, if it didn’t do this then it wouldn’t be showing you the max TFLS.  I’m pretty sure that’s as complex as it gets. Anything ‘in between’ is available via playing around with the TFLS and DC-remaining sliding scales.

I need to get round to working out if it's ever worth taking the reverse-commutation option.  I always assumed not (due to the poor conversion rate) but I wonder if it is if you have sufficient money in your IB.

Found an old note I’d made for my myself a while back. Your circumstances will doubtless be different but here’s where I got to: [hope my maths was correct!]
———————————————————————————————————
Reverse Commutation - worth it?

Factor is 20.97.

Meaning I get £47.70 in AP per £1,000 given up from IB.

Which looks like 4.77%

But after tax (@20%) that £47.77 is only worth £38.22

Equivalent to net return of 3.82%

Discounting annual lift, would take 26 years to recover the £1,000 given up. Probably closer to 20 years factoring in annual uplift, but then the £1,000 would be - hopefully - giving a decent return left invested.

Could I get more than net 3.82% from interest in ISA or from investments? Maybe, maybe not.

——————————————————————————————————

I did a number of permutations and it always came ‘round to being equivalent to between 3.5-4.0% net equivalent return. Concluded that I would probably only do RC if I wanted/needed to maximise the TFLS but neither applies in my case.

Good info, thank you

I'm planning to have quite a bit in my IB at the point of retirement so the reverse commutation option is tempting just to simply have more tax free cash and more regular pension.  That said, it doesn't seem like the best value for money and I do plan to purchase an annuity with some of the remaining (uncrystalised) IB funds, so outside of the childish part of me that likes to see the numbers look bigger on the USS calculator, it's probably not an option to pursue.

Barralad77

ussdave said:

I'm planning to have quite a bit in my IB at the point of retirement so the reverse commutation option is tempting just to simply have more tax free cash and more regular pension.  That said, it doesn't seem like the best value for money and I do plan to purchase an annuity with some of the remaining (uncrystalised) IB funds, so outside of the childish part of me that likes to see the numbers look bigger on the USS calculator, it's probably not an option to pursue.

Out of interest, how do you buy an annuity with just some - not all - of the remaining IB fund? I thought I’d read somewhere that to retain the status of (e.g.,) the IB pot as a pension then the whole pot needed to be transferred to another pension provider and I’d assumed that it would all have to be thrown at a single product (e.g., an annuity). Is it possible to transfer it out of the IB, keep it inside the pension ‘wrapper’ and then divvy it out across multiple products?