USS pension and commutation factors

atw_uss

Hi, just starting a new thread specific to this, as I continue to try to educate myself about pensions before becoming eligible to take mine (USS) if I want to this summer. All relevant opinions and experiences very welcome!

So I now know that a portion of my DC pot (c.£68K out of £105K currently) is made up of MPAVCs with Prudential (transferred in) which can still be converted to additional DB benefits (beyond the April 2022 cut-off for non-MPAVCs). This has been confirmed to me by USS in writing.

The question I am trying to answer is whether this would this be good value. Having read my USS forecast several times and also posts on here, I'm beginning to think that commuting is a good idea in this scheme, certainly these days (as opposed to trying to buy a bigger pension). Basic DB would be approx £9K, rising to £10,800 if I blow most of my DC pot on it (c.£42K lump sum). Actuarial reduction c.25% as most of my pension predates 2016 changes, so it's not too bad and won't grow massively if I freeze it.

I realise from posts here that CFs vary a lot from scheme to scheme and over time. This is what my forecast states:

Retirement Income Builder CF (DB pension into lump sum) = 28.8430

Retirement Income Builder CF (lump sum into DB pension) = 48.0840

Investment Builder and Prudential MPAVC CF = 57.96 (currently for DC into added DB)

I'd be grateful for any thoughts on this. If I decide to finish on my 55th birthday, my current thinking would be to take max tax free lump some and leave a bit in the DC pot (then transfer elsewhere, leaving it untouched until needed). I'd probably get a (less stressful) part-time job to keep me ticking over for a few years. OH has very good pension, so we'd have enough to live reasonably comfortably without having to work. I want to avoid triggering MPAA for now.

Thank you!

bluenose1

Just deleted my original reply as realise you can take tax free max lump sum from USS without affecting the MPAA. 

I won’t  be converting my lump sum into pension either with those rates and will probably take the max lump sum on offer. 

I’m 56 this year and in USS so weighing my options to go in next 12 months as well, as well as taking actuarial reduction. Though will only take it early if I need the money. Worth doing a spreadsheet comparing taking it early and the effect inflation has etc. I know you said won’t increase massively but if inflation is high next couple of years then it could go up more than you think.

just been using the USS benefit conversion tool to have a play around with my figures.

atw_uss

Thanks, @bluenose1 - yes, I was quite surprised that so much of the Investment Builder can be taken as tax free cash. This is something really good, I think. Having played around with the Benefit Conversion Tool (using the figures from my forecast), it looks like I'd be best taking max tax-free lump sum of around £60K and leaving a similar amount in the DC pot (which I would then transfer to another provider on retirement, holding off on triggering MPAA until I need it or no further work planned), rather than boosting my DB pension. It looks like a lot of money for very little additional pension.

ewaste

The CF for converting DB to lump sum I wouldn't touch, especially if your somewhat healthy and are likely to be around a while.

The Commutation Factors for lump sum to Defined Benefit income, I'd gather that is from Age 55. What inflation linking does it have e.g. CPI capped at 2.5%, does it also include 50% spousal benefit? Essentially what are the terms so we can compare value for money vs open market rates. Edit:- Although in hindsight I'd gather it's the same terms as the main USS DB pension element.

Although I'm confused as you said £42k lump sum buys £1,800 e.g. £9k pension gets increased to £10.8k. I'm probably missing something but that'd be a rate of about 23, lump sum to pension, which I'd certainly say is worth it.

Without being too knowledgeable on annuities, other than a quick Google for rates, the other rates look to be about right for age 55 with 3% escalation and 50% spousal benefit. As you say it doesn't look like much additional Defined Benefit income for the money. However that's the reality for many without an actual DB scheme and why annuties aren't as popular these days.

atw_uss

Thank you for your reply, @ewaste!

Apologies for any lack of clarity ... this is down to my own confusion, I'm afraid. Part of the difficulty is that a lot of my DC pot is made up of MPAVCs which can still be used to buy more pension. I'm taking rounded figures (and options) from my forecast:

1. Basic pension = £9K + £27K TFLS + £105K DC pot

2. Maximising pension I can have up to £10,800 leaving a TFLS of c. £42K (DC pot used up too), or

3, £10,300 leaving TFLS of £68K (DC pot used up), or

4. Stick with £9K but take £60K max TFLS + £60K left untouched in DC pot (MPAA not triggered)

I'm leaning towards option 4, although I can take any amount in between by adjusting figures. My mind is exploding currently. If I can continue part-time, I probably will, but if not, then it may be retirement and a little PT job elsewhere very soon!

bluenose1

Option 4 would be my favoured option as well as USS are obviously trying to discourage pension purchase from lump sum as they don’t want to increase their liabilities.
Know what you mean re head exploding. Despite all the research I’ve done on my USS pension I only this weekend started to understand how having a DC pot will allow me to take the maximum tax free lump sum without reducing my DB pension. 

Though I don’t understand how in option 1 above you have a total pot of £132k and in option 4 you have a pot of £120k.
when I do the different tax free options for me the total DC pot stays the same, though not sure if this is because mine is all in Investment Builder.