Arguments for/against paying into a pension

dllive

Hi guys,
Ive just had it confirmed that I cant make AVCs via salary sacrifice.
With that in mind, what are the benefits - if any - of making AVCs into USS compared with my SIPP (Vanguard LS100 fund)
Thanks

Secret2ndAccount

dllive said:

Hi guys,
Ive just had it confirmed that I cant make AVCs via salary sacrifice.
With that in mind, what are the benefits - if any - of making AVCs into USS compared with my SIPP (Vanguard LS100 fund)
Thanks

If the USS and the AVC are officially linked, then there is a benefit - the tax free lump sum.
The USS will offer you a tax free lump sum upon retirement. Maybe it's 3 yrs pension. HMRC allows up to 25% of the pension's value to be taken. That's maybe 5 yrs pension. So you could have a larger TFLS, but the scheme doesn't allow it (or allows it, but with a very expensive conversion from pension to lump sum). This is where the AVC comes in. You cash in the AVC in order to boost the TFLS from what was offered, up to the full 25% limit. In other words, all the money that went into the AVC comes back to you tax free. Tax relief on the way in; no tax on the way out.
So, two things to look at:
1. Make sure that the two parts of the pension are linked;
2. Work out how much you can get out of the AVC: the difference between 1/4 of your pension (USS annual x 20 + AVC) and the lump sum offered (maybe 3 x USS annual, but read your scheme's rulebook). See if you can get this much into the AVC before you retire.

Downside is that you might not be able to get at the AVC without taking the USS pension. A SIPP can be accessed at 55 or 57 without starting to take your USS pension.

dllive

Ah I see. I hadnt realised there was a TFLS benefit with USS. Just to clarify - how much, if any, TFLS can I get from my SIPP?

Secret2ndAccount

You can take up to 25% of your SIPP tax free at any time after age 55 or 57. 
If you leave the SIPP to grow, then the 25% part grows too. Once you've taken 25%, all of the rest of it is taxable. If it grows, it's still all taxable when you withdraw. It's called crystalising your funds. Effectively you split your SIPP into two parts; there is a crystalised part which is all taxable (because you've had 25%) and an uncrystalised part which still has the 25% tax free to come.
If you take any of the taxable part (not the tax free lump sum) then this limits your future contributions to SIPP or AVC to 4k/yr, though it doesn't limit your USS contribs because that's a Defined Benefit pension.