Additional pension contributions or savings?

atw_uss

Apologies if this is a very naive question.

I am currently paying into the USS pension and am paying an additional 10% monthly - I will be 55 next year. I am undecided on final retirement age but it could be anytime between next year and 60, depending on a few variables. I have approx £100K in the Investment Builder to boost things, so all will be reasonably secure whenever I decide to go.

I receive a little additional income every year through external examining. These payments come direct to me taxed, but I have reached the point where I am thinking about putting them towards my pension or savings. It's only £150-£200 each time, but I'd like to save them up for a rainy day. My question is really whether it would make more sense to open something like a SIPP or a Stocks and Shares ISA, both of which would have more investment options than USS? I'd be willing to be reasonably adventurous/less risk averse, as this is additional to my annual income and I'd be in no rush to take it.

Any advice gratefully received, as always!

MX5huggy

Yes use a SIPP, presuming you paying 20% tax and will only be paying 20% tax in retirement.

I don’t know if your additional USS pension contributions are by Salary Sacrifice so even more tax efficient? 

If you have any significant savings you should be stuffing them to your pension now as you get 6.25% up lift due to the tax treatment. 

atw_uss

Thanks, MX5huggy - yes, I can add to my pension via payroll using salary sacrifice, and this keeps me in the 20% tax bracket.

It's really a question of whether a SIPP might make more sense for these additional smaller amounts, given I'm willing to be less risk averse with them. For the main USS pension (DB and DC pot mix), I will stay a little more conservative with the DC part. There is a limited range of investment options in USS.

ElmoR

Am in a similar boat to you atw_uss. Though a few years younger and slightly behind on accumulating in the investment builder. I also overpay into the scheme each month.

I worked out how much of a bridge in money I would need to get me from age 60 to 67, that would be needed above the benefits payment each month at 60 (if that makes sense) to have an income of approx £30k. Then I save invest into a SiPP (90%) and ISA (10%) to start building it up. I'm a few years away from 55 so funneling it all into a SiPP seemed a bit risky if a situation cropped up where I needed some money (though I do have an easy reach emergency fund). 7 years to go...

edited because the forum detail checkers correct you if you mix up saving and investing

ussdave

I'd be tempted to just slightly up your salary sacrifice payments and use the external examiner money to make up the shortfall.  You could always ask for (e.g) 1% of your contribution to be into a low risk fund.  Keep in mind that the lack of charges in the USS IB is a significant benefit you'll miss out on in a SIPP.

Reason are:
Salary sacrifice is the most tax efficient way to save of your available options.
USS allows you to combine your DB and DC values for the purposes of TFLS.

The only reason to go for a separate SIPP would be if you wanted to use the money to bridge and defer taking your USS DB pension.  At the moment the ERF terms for USS are quite good so I think the value of this option is not quite as good as if you had (e.g.) an LGPS pension.  Personally at the moment I'm concentrating on the USS IB pot and I will draw the pension early.  If ERFs worsen I'll reconsider.  

If you will be impacted by the upcoming changes in pension access age then you may want to reconsider and start topping up a SIPP that is likely to retain access at 55.

MX5huggy

atw_uss said:

Thanks, MX5huggy - yes, I can add to my pension via payroll using salary sacrifice, and this keeps me in the 20% tax bracket.

It's really a question of whether a SIPP might make more sense for these additional smaller amounts, given I'm willing to be less risk averse with them. For the main USS pension (DB and DC pot mix), I will stay a little more conservative with the DC part. There is a limited range of investment options in USS.

In that case you also save 12% NI so your “Risky” SIPP would have to perform 12% better before you broken even. 

atw_uss

Thanks all, this makes very good sense, and I completely take the point about a SIPP needing to earn +12% before it could match the NI savings. 

I guess I could do ‘The Match’ option at +1% or just add a couple of % to the extra I’m paying now and put a similar % in a higher risk fund. 

Lots of options - the Emerging Markets fund hasn’t done so well recently, but I wonder whether this might be worth some low % investment (crystal ball time)! For now I’ve got a mix of moderate growth, global equity and some ethical funds.

I’m still working out if I could afford to pay closer to +20% per month, as with salary sacrifice, this looks the right thing to do. Will hopefully be mortgage free from early 2021 so more household disposable income to prop up my early retirement aspirations!

Unfortunately, I don’t think I could save enough in a SIPP to enable a deferral of DB pension … although I do have £20K in a stakeholder that I could put into a SIPP instead (currently looking at moving it to the IB too). 

@ussdave, am I right in thinking I can take my IB early but could defer the DB part of the pension to reduce early retirement reductions?

Albermarle

I’m still working out if I could afford to pay closer to +20% per month, as with salary sacrifice, this looks the right thing to do. Will hopefully be mortgage free from early 2021 so more household disposable income to prop up my early retirement aspirations!

Pretty much what most of the regular posters on here did/do . Maximise pension contributions , especially in the later years when it was more affordable.

atw_uss

Albermarle said:

I’m still working out if I could afford to pay closer to +20% per month, as with salary sacrifice, this looks the right thing to do. Will hopefully be mortgage free from early 2021 so more household disposable income to prop up my early retirement aspirations!

Pretty much what most of the regular posters on here did/do . Maximise pension contributions , especially in the later years when it was more affordable.

Thanks, Albermarle (sorry, was just editing my comment and have added a bit). The more I read, the more this seems to make sense. It would feel a lot to pay, say, an additional 20% when I already pay 9.6% (rising to 11% next month?), but the tax/NI breaks seem excellent, and the actual ‘hit’ on my take home pay is manageable..

ussdave

You can take your IB early but to do so you have to give up the linking of you DC and dB benefits, so your TFLS will be negatively impacted.

If you wanted to go this route it would be better to transfer your IB pot out now to a separate SIPP and massively up your contributions to get your IB back to a decent level.  Something like this was originally my plan but after doing more reading I'm now just putting everything into my IB pot...at least until I've had the time to properly sit down and work out the figures.  On the face of it, this seems as optimal as any alternative strategy.

ussdave

atw_uss said:

Albermarle said:

I’m still working out if I could afford to pay closer to +20% per month, as with salary sacrifice, this looks the right thing to do. Will hopefully be mortgage free from early 2021 so more household disposable income to prop up my early retirement aspirations!

Pretty much what most of the regular posters on here did/do . Maximise pension contributions , especially in the later years when it was more affordable.

Thanks, Albermarle (sorry, was just editing my comment and have added a bit). The more I read, the more this seems to make sense. It would feel a lot to pay, say, an additional 20% when I already pay 9.6% (rising to 11% next month?), but the tax/NI breaks seem excellent, and the actual ‘hit’ on my take home pay is manageable..

Like anything, you need to look at things as a whole rather than individually.  If you end up saving 20% of your salary for pension purposes then it doesn't matter if it is split into two lots of 10% or one 20% contribution - but it does matter if any of it is less optimal.  So, assuming other things are equal, saving all of that 20% through salary sacrifice is going to give you the most money when it comes to retirement.