USS - General discussion

ussdave

Barralad77 said:

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?

Always worth checking that I've not misunderstood but I believe you would transfer it to (e.g.) a SIPP and from there you could use part or all of the funds to purchase an annuity product.

As far as I can tell, once it's transferred out (which in my case I would be doing with the left over IB funds after drawing the RB and IB together) it's a separate pension pot and can be managed entirely free of any USS rules or interference.  

To muddy the waters a bit more, I'm still considering transferring some (well, it'd have to be all at this stage) IB funds out in advance of retirement to give me a few options regarding bridging via UFPLS or earlier annuity purchases.  I've got a decade or so to make a decision on that though.

Barralad77

Thanks for that; interesting. I’m sure you’re on top of it but won’t taking it early mean you you lose the tax advantage that comes with taking it out of USS at the point of retirement? I’m guessing that transferring it to a SIPP early will mean getting 25% of it tax free but that’s less than what you get if you wait until retirement. Or possibly not; it’s all tremendously complicated.

Cobbler_tone

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)

I dip into this thread as whilst I don't have a USS pension my OH does. She will finish aged 54 next summer, so will look to access it in 2027, after funding her 'year of peace' using VS. I understand the main pension (DB) and Investment Builder (DC) and during her final year is putting a significant amount into it.

This explanation makes sense as I haven't been fully able to establish the options with the IB once retired. It won't be at these levels as she only has 6 years service or so and not her main pensions.

If the above option is a valid one it could be something she takes. It is laid out in a way I understand.
She definitely won't need more cash and any security of an enhanced pension will be attractive to explore, i.e. by maximising both parts of the pension.

How would this calculation vary for someone aged 55?
I must admit that I haven't studied her portal in detail, so the answers may be all there when the time is right.

Barralad77

The calculation is the same regardless. If she has money in the IB then she can buy some extra pension (using money from the 3xAP lump sum*) via reverse commutation (RC) then take some/all/none of the money from the IB depending on how big the IB pot is at that point and whether she wants to maximise the amount she can take tax-free or leave it invested in the IB. The big issue, though, is the actuarial reduction (the ‘factor’) that would be applied by taking it many years before NPA. Looking at the factors the unreduced value (which won’t be very big if only 6 years’ contributions) would be reduced by around 40%. Unless she/you both need the pension in 2027 it might be better to defer taking it for a few years. The pension will have a better factor applied and will continue to grow by CPI (up to a cap) until then. Plus the money being pumped into the IB next year will have time to grow (meaning she could could be more adventurous in choosing which funds to invest in). 

*another benefit of taking the benefits at a later date would be better RC rates (the younger you are, the less pension £1k buys you, for example).

ussdave

Barralad77 said:

Thanks for that; interesting. I’m sure you’re on top of it but won’t taking it early mean you you lose the tax advantage that comes with taking it out of USS at the point of retirement? I’m guessing that transferring it to a SIPP early will mean getting 25% of it tax free but that’s less than what you get if you wait until retirement. Or possibly not; it’s all tremendously complicated.

Yeah... It's a bit of a pain as I'd need to time it early enough that I could top it back up enough to max out the TFLS at the point of retirement.  Or I could transfer a small amount back in instead.  

Cobbler_tone

Barralad77 said:

The calculation is the same regardless. If she has money in the IB then she can buy some extra pension (using money from the 3xAP lump sum*) via reverse commutation (RC) then take some/all/none of the money from the IB depending on how big the IB pot is at that point and whether she wants to maximise the amount she can take tax-free or leave it invested in the IB. The big issue, though, is the actuarial reduction (the ‘factor’) that would be applied by taking it many years before NPA. Looking at the factors the unreduced value (which won’t be very big if only 6 years’ contributions) would be reduced by around 40%. Unless she/you both need the pension in 2027 it might be better to defer taking it for a few years. The pension will have a better factor applied and will continue to grow by CPI (up to a cap) until then. Plus the money being pumped into the IB next year will have time to grow (meaning she could could be more adventurous in choosing which funds to invest in). 

*another benefit of taking the benefits at a later date would be better RC rates (the younger you are, the less pension £1k buys you, for example).

Thank you, we will review at the appropriate time. We have 5 pensions, two DB and three DC which we will take either all at once (early) or staggered. My DB is the main one which we will take with a bridge early. We will have cash, so it will be a balanced decision. Ultimately we will take reduction factors, as firstly they aren’t designed to be punitive (certainly not in mine), and secondly they allow us to retire significantly earlier. Could be a case of taking the DB’s and leaving the rest invested. 

Cobbler_tone

In a position to ask some basic questions to the 'experts' with some actual rules and data:



I can see this rule, so the LS number doesn't quite tally:


There are also C and RC rates:


Couple of questions:

1. Is the annual income to have reduction factors applied against it if taken early? i.e. is this assuming it is what is built up if you take at NRA?
2. I can't see defined rates to generate extra pension using (for example) £50,000 from the Investment Builder (DC) scheme. i.e. if you wanted to use the full IB to create pension, is there a simple way to calculate this verses your age?

This is a top up pension but would be good to make best use of it if none of the cash is required.

Thanks 

Barralad77

The lump sum figure looks correct to me (4,404.61 x3)?

[1] Yes, the figure above is what you will get at NPA. To calculate what you’d get earlier apply the relevant early retirement factor (I think in my earlier reply I reckoned it would leave you with around 60% of the above figure).

[2] You can’t use money from the IB to buy extra pension. You can only buy extra pension with the 3xLS. If you have a sizeable sum such as that and wanted to buy an annuity you would have to transfer the money out of the IB into another pension provider.

The simplest thing to do is just go through the steps in the calculator. It’s not without its faults but it will give an idea.

Cobbler_tone

Barralad77 said:

The lump sum figure looks correct to me (4,404.61 x3)?

[1] Yes, the figure above is what you will get at NPA. To calculate what you’d get earlier apply the relevant early retirement factor (I think in my earlier reply I reckoned it would leave you with around 60% of the above figure).

[2] You can’t use money from the IB to buy extra pension. You can only buy extra pension with the 3xLS. If you have a sizeable sum such as that and wanted to buy an annuity you would have to transfer the money out of the IB into another pension provider.

The simplest thing to do is just go through the steps in the calculator. It’s not without its faults but it will give an idea.

Thank you. Fat fingers on the calculator for the 3 x LS, so it's good that reconciles.
Point 1 was suspected and changes the numbers somewhat. I am used to a deferred scheme where you can define the retirement date.
Point 2, thank you for clarifying that the two need separate treatment. 

Barralad77

Re. Point 1. The closest you might get to the numbers if deferring is to use the calculator to see what they would be at the point of finishing work (the point at which contributions cease, which I think you said would be at 55) then model what they would be each year after that by (a) using the slightly better early retirement factor each time and (b) increasing the starting reduced AP by a nominal CPI figure (e.g., 2.5%) annually.