USS changes - worth staying in?

Southend_2

Looks like proposed changes to USS are progressing. Any thoughts on whether it is worth staying in?

 I'm 40, earning £35k full time. My concern is the 2.5% CPI indexation cap. With potentially 28 years to go before I draw my pension, how much will it be worth? What if we have a few years of 10% or above inflation? Would i be better off using a SIPP or LISA and forgoing what is on the face of it a generous employer contribution?

grumiofoundation

You have to consider if you are confident you can offset the employers contributions (in reality the headline number is less important what matters is the benefits) with investments in SIPP/LISA* and what value you you place on guaranteed income. 

*assuming you already have S and S LISA open. 

Also consider inflation will also reduce value of investments in real terms.

Presuming you are contributing via salary sacrifice the 11% that you would pay* in only costs you in terms of take home pay ~7.5%/~6.5% (lower number of you have a student loan (9% if earnings). *If 11% contribution rate confirmed? 

Contributing to a SIPP/LISA you won’t get the NI savings so paying in 7.5% will net you 9.4% of pay in SIPP.
So on 35k that’s 3,300.

USS will gain you 1/75 of salary (plus 3/75 lump sum) that’s £467 (in today’s money). 

In today’s money is obviously a no brainer to go for USS. 

But if we have 28 years of inflation averaging say 4% but pension capped at 2.5% the £467 will become £940.
If had risen at 4% per year would be £1400.

So yes your pension is worse less that it ‘should be’ but that is somewhat immaterial because what would matter (if you opted out) is will your investments have beaten that? 

At say 7.5% (not inflation
adjusted) growth over 17 years your £3300 contribution is now worth ~£27,000 (~£9000 in todays money). 

Using numbers above would you rather have £27k* or a guaranteed Income of £940? 

*Depending if in LISA not taxable but would be in SIPP. 

Obviously this just looking at value of USS/investments over one years worth of contributions. 

Southend_2

Thanks...I think the accrual rate is proposed to change from 1/75 to 1/85 as well as the 2.5% inflation cap.

grumiofoundation

Southend_2 said:

Thanks...I think the accrual rate is proposed to change from 1/75 to 1/85 as well as the 2.5% inflation cap.

Haven’t read proposals in detail (just left university!).

But until/if this (actually) happens I would certainly be staying opted in. 

Can just multiply the above by factor of 75/85 to get proposed benefits. 

Decision might depend on your wider retirement plans, eg other pensions, partners pensions, age of retirement aiming for, mortgage etc 

Personally I wouldn’t be opting out, even if investments ‘should’ beat it I wouldn’t be turning down the guaranteed income of USS. 

As I am invested in stock market elsewhere, and this will only increase especially wife’s DC pension so I would look at DB pension as offering good diversification even if returns are lower (which they may not be). 

Southend_2

Hoping to retire at 60 or soon after. Currently saving additional 5% in USS DC and 10% into a S&S LISA to boost pension and bridge the gap to state pension age.

 I'll stay in USS until any changes take effect but am mindful of the risk of inflation wiping out a significant proportion of my DB pension given the time horizons until retirement / death. Lots of talk lately about the likelihood that the government will try to inflate away pandemic related debt in the coming few years.

randompenitent

Don't underestimate the challenge of beating inflation with your own investments - 2.5% indexation isn't great but high inflation can be pretty brutal to investments generally.

I'd also note that despite the news of USS deficits, it's about as secure as DC pensions can be, backed jointly by a large number of financially strong institutions.

2nd_time_buyer

As grumiofoundation says I am intending to stay in until the changes are made.

The proposed changes seem poor value for members and the union look set to strike over it if. If it was put into practice - I suspect a sizeable proportion of members will vote with their feet and leave which will further weaken the scheme.

Personally, I can't see it going through.
... so it looks like there might be two realistic outcomes for the long term sustainability of the scheme: 

1) Switch to full DC scheme, keeping employer contributions around current level (it will have to be a bit lower to pay off the claimed deficit)

2) Introducing conditional benefits where the index linking is related to stock market performance 

I suspect that (1) would be preferred by the USS and the employers. From canvassing opinions of colleagues I suspect it would also be preferable to most non-union members of the scheme. However, I can't see the union going for it.

Number (2) is a compromise that could satisfy all parties. However, it is relatively unproven and will take a while to put in practice. It will also be a difficult sell to members who have generally lost confidence in the USS to manage a DB scheme and who will find it difficult to comprehend the potential ramifications.

Either way it is going to take a while to resolve.
  

Tomatillo

Does anyone know whether it is proposed that the 2.5% cap would apply to benefits that have already been built up (including the closed final salary scheme)?

2nd_time_buyer

Tomatillo said:

Does anyone know whether it is proposed that the 2.5% cap would apply to benefits that have already been built up (including the closed final salary scheme)?

No. Proposed changes only apply to future contributions. I believe there is a legal precedent for this.

. 

Tomatillo

Thanks v. much. 

ussdave

The new changes are pretty poor and very detrimental but it's still a good scheme and as already pointed out, if you opt out then you're not getting any employer contributions and it will be extremely expensive to try and match (not even beat) the current benefits.