USS pension additional contributions vs SIPP (and other things)

DealingWithEstate

hi there,

I have some questions about pensions and investments and hope someone will be able to help me.

I have recently inherited £180k, so am reconsidering my savings / investments / pensions. My financial situation up until this point in brief: mortgage free with a BTL on interest-only mortgage of £140k. Member of USS, and have been paying into the Investment Builder through salary sacrifice for about 5 yrs. My OH also in USS, has been doing the same thing with the Inv Builder and and we each have about £20k in savings (cash ISAs). And I'm 53...

With this additional money coming in we are trying to work out what best to do with it. Have seen an IFA, but he seemed to be very keen on setting up a private pension for me, and didn't know anything about USS.

 From what I have gathered our best options are:

1. Put as much as we can through salary sacrifice into our USS pensions (up to £40k pa each). So far we have used about half of our Annual Allowance, so could increase this. BUT my understanding is that this "pot" will be less good if I want to retire early? Is this correct, and is this a reason to set up a SIPP? Is the USS with salary sacrifice always going to be better than any other pension / SIPP?
2. Put other savings into S&S ISA. I can move the existing £20k that is in the cash ISA into a S&S ISA, and add £20k for this year too, then another £20k after April. And my OH can do the same. Is this correct, and the best ?
3. What is the next best thing to do after pensions and S&S ISAs?

Finally, I have booked a free one-off appointment with a Lighthouse Group IFA (UCU's (my union's) preferred advisors), and wonder if anyone knows anything about them?

 

Many thanks!

NedS

We have some very knowledgeable USS members here, so they will be able to advise you of the finer details, but I would imagine contributing by salary sacrifice to USS IB is always going to be more efficient (as you have the NI saving too) than contributing to a private SIPP. I believe I'm right in saying (and others will correct me if I'm wrong) that you can always transfer funds out of USS IB to your SIPP later down the line if you require that flexibility. The other trick you can do with the USS IB is use more of the IB pot to fund a lump sum rather than commuting valuable DB benefits.

With respect to other options (3), the obvious suggestion would be to clear the mortgage. How much interest are you paying, and if you have a fixed rate deal, how long before it expires and you are looking at significantly increased mortgage repayments?

Dazed_and_C0nfused

Member of USS, and have been paying into the Investment Builder through salary sacrifice for about 5 yrs. My OH also in USS, has been doing the same thing with the Inv Builder


Put as much as we can through salary sacrifice into our USS pensions (up to £40k pa each). So far we have used about half of our Annual Allowance, so could increase this. 

Is adding money to the Investment Builder in addition to the standard USS defined benefit scheme?

If so you will need to consider the pension input element as well as your investment builder contributions to determine how much of the annual allowance you have used.

deltrotter

Anybody worked out what PIP is in the USS if you are fortunate enough to be at max on that side of the pension.

Just wondering how much that would leave out of the £40k annual allowance for defined contributions.

DealingWithEstate

Thanks all. So the headline I am taking away is

"contributing by salary sacrifice to USS IB is always going to be more efficient (as you have the NI saving too) than contributing to a private SIPP"

@Neds - can you explain what you mean by "use more of the IB pot to fund a lump sum rather than commuting valuable DB benefits"?

@Dazed... yes, putting extra into the Inv Builder

@deltrotter - I'm afraid I don't understand what you mean by PIP in the USS... Can you explain?!

And yes, I have asked my employer to work out the Annual Allowance I have left, and would aim to put the maximum in.

Thanks!

NedS

DealingWithEstate said:

@Neds - can you explain what you mean by "use more of the IB pot to fund a lump sum rather than commuting valuable DB benefits"?

The maximum anyone can take as a tax free lump sum from a pension is 25%

You have 'a pension' that consists of two parts - the DB part and the IB (DC) part, but when determining how much tax free cash you can take, they are treated together as one pension.

As I left the scheme before the IB component was introduced, when I retire I get my DB annual pension plus a default lump sum of 3 x DB pension. I can choose to increase or decrease the amount of tax free lump sum I take - take less lump sum in exchange for more DB pension, or vice versa (up to the 25% limit). So I have to make a difficult decision whether I want to give up valuable index-linked DB pension in exchange for a one off tax free lump sum.

In your case, because you also have the IB pot sitting within your 'USS pension', you can choose to take all of your tax free lump sum from the IB pot (assuming the IB pot is big enough) and thus retain the maximum amount of index-linked DB benefits. This is a very efficient way to take a tax free lump sum from a DB pension, so it is worth ensuring that there is at least sufficient in your IB pot at planned retirement to allow you to take the maximum tax free lump sum (the rest you may choose to transfer out into a SIPP for more flexibility, e.g, to fund early retirement before your USS NRA)

Dazed_and_C0nfused

DealingWithEstate said:

Thanks all. So the headline I am taking away is

"contributing by salary sacrifice to USS IB is always going to be more efficient (as you have the NI saving too) than contributing to a private SIPP"

@Neds - can you explain what you mean by "use more of the IB pot to fund a lump sum rather than commuting valuable DB benefits"?

@Dazed... yes, putting extra into the Inv Builder

@deltrotter - I'm afraid I don't understand what you mean by PIP in the USS... Can you explain?!

And yes, I have asked my employer to work out the Annual Allowance I have left, and would aim to put the maximum in.

Thanks!

There are exceptions.  Low earners who aren't paying tax could well be better contributing personally and benefitting from tax relief even if this means no NI saving.