USS pension - to continue making AVCs or to start a SIPP with Vanguard?

dllive

Hi guys,

I am employed and I am also self-employed. (yes, my partner is very understanding of my time commitments!)

Its coming up to my end of year. Ive maxed-out my ISA allowance (obviously). Ive also paid about £25k into my employers pension scheme (USS. These payments are not salary sacrificed and not matched) and £4k into the USS scheme which automatically come out of my monthly pay - so about £30k in total this year to my pension.

Ive had a particularly good year this year and have found myself in the fortunate position of holding a lot of cash. So much so that Ive started a GIA (ie: non-tax wrapper) with Vanguard to shuffle money into and keeping any income within the dwindling dividend tax allowance threshold.

I luckily dont have many outgoings, hence why Im sat on a lot of cash. So what's a girl to do? I dont have the stomach for VCTs or direct company share dealing. I just want to shuffle money into passive tracker funds as tax efficiently as I can.

Does that only leave me with pension contributions? If so, should I continue making additional contributions to my USS pension, or is there a benefit to starting a SIPP with Vanguard and investing in - say - LifeStrategy100?

I read somewhere that I can only pay in £40k per year into a pension. Is that right?

If the view is to stuff as much as I can into a pension, then I would do so but keep  it as cash and pound-cost average over the forthcoming months. (Im not sure this is even do-able with USS!).

Many thanks for any guidance, recommendations or tips.

gsw55

Personally I would certainly max out on my pension allocation  (40k) for the year through a SIPP. The government will give you a tax rebate at your current rate (20 or 40%). For me that would be a no brainier. I probably wouldn’t make extra contributions to my company scheme unless there were long term benefits. But I assume you’ve checked that out. I was in a similar position during the last few years before retirement. The contributions gave me significant tax benefits and continued to grow after I retired. It can all be quite complex but well worth researching and doing.

Dazed_and_C0nfused

I read somewhere that I can only pay in £40k per year into a pension. Is that right?

No, its more implicated than that.

Depending on your income and any unused allowance from the previous 3 years you could in theory pay £160k in one year.

In reality it will be a lot less due to your contributions in previous tax years.

If your standard USS pension is a DB scheme then it gets more complicated as it's not the contributions which count for that pension, it's the pension input amount (relating to the value of the pension, not the contributions).

So if you want to contribute* more than £40k you will need to look back at 2019:29, 2020:21 and 2021:22 to understand what will be possible.

*mix of actual contributions and PIA amount.

Universidad

You can pay as much as you like into a pension, the limits are when the it stops being tax efficient to do so - i.e. you might owe tax back on contributions that previously weren't taxed.

You can't pay in more than 100% of your salary, and the value can't exceed 40K, without needing to pay tax on those contributions.

For DC pensions the value is how much money you put in. For DB pensions (up to the 40K salary cap in USS) the calculation is more complex, but it's roughly 16x the value of the annual income you accrue (+ the value of the 3/85 lump sum that you accrue).

If your salary is over 40,000 then the value of the DB portion in USS will be about 9000, not just the cost of your contributions.

1/85 of 40,000 = ~470.

annual pension value + lump sum value

(470 x 16) + (470 x3) = 470 x 19 = about 9000.

(There is a bit of extra maths about inflationary increases which we'll ignore for simplicity, but you should look into that in more detail)

So if you've paid 25,000 into your DC pot this year, then you're probably closer to 35K than 30K for this year's contributions.

 

However, you can also carry forward, as described above, if you were below the limit in some previous years.

As for investment options,I've no love for where USS has gone to, but you should factor in that additional contributions to the USS Investment Builder benefit from employer subsidy of the investment fees.

Don't know if you want all your money in one pot.... my view of USS is prejudiced by years of cut after cut to the DB portion of the scheme, so I don't think my view on it is entirely rational. It's probably safer than I feel like it is. When it looks like your pension provider is perenially in trouble, it doesn't inspire confidence.

Cornish_mum

Hi

I recommend you log on to myUSS and look at your DB and DC benefits for this tax year and the proceedings 3 years. To see how much of your annual allowance you have used. For previous tax years you can logon and see your used AA ; it’s added in the autumn for the previous tax year.

But you will need to manually calculate it for this year. This tax year the maximum USS DB benefit is 1/85 of the salary cap £40,000, so £470.58 pension + £1411.76 lump sum. You need to use the HMRC conversion to work out how much of your AA this uses. Then add to this the amount you and your employer have added to the DC. Plus what you will contribute into the DC till the end of the tax year.

Then you will know how much AA you have to play with and if you have any scope to contribute to a vanguard SIPP.

It’s your responsibility to not exceed the AA and inform HMRC if you do; so you can repay the tax. 

In USS you choose what you invest in the DC part of the scheme, the choices are different to vanguard. It’s basically standard, ethical or emerging market and then you can vary the risk level (ie bond to equity ratio). I am pretty sure you can also choose a cash option (designed for those soon to retire).

USS is actively managed but DC fees are paid by our employers. I like you would prefer a passive fund but as I can salsac the NI saving offsets the inefficiency of active management (in my opinion). Double check you can’t salsac most university do permit it. Though of course you might have other reasons not to want to. Just be aware that we can only contribute down to the national minimum wage.

I choose to max out our AAs in USS, to keep below CB threshold and then use vanguard for our S&S ISAs (target retirement fund, as I am a set and forget kinda gal). Pound cost averaging for both (monthly contributions). 

I would think not only on tax efficiency on the way-in but also the way-out including your anticipated retirement age.

Lastly congratulations on your great contribution rate!

CM

dllive

Thanks all! Theres a lot here for me to digest. Ill get back to you if I have anymore questions if thats ok.

A couple of things:
1) I definitely cant SalSac contributions. Ive checked this twice with the Pensions Dept. Ive heard its almost universally done via SalSac so - given the institution I work for - I was very surprised to find out its not! (hence why I checked twice with the Pensions Dept!!)
2) This is the first year Ive made AVCs, so Im sure I can carry over the past 3 years of unused amounts. Ive got £30k in cash form this year's income to play with

Thanks all. Youve been very helpful as always!

dllive

OK, Ive just logged into my USS account and looked and it seems that in the previous 3 tax years Ive used £10k per year of my Annual Allowance. (I havnt made AVCs before so presume these are my contributions and my employer's contributions?)

So I could comfortably put £30k this month into my Vanguard SIPP because Ive got about very roughly £90k of AA I can carry forward? 

Then, how is the AA forwarded amount calculated for next year, and the year after etc...?

Apologies, I feel I should know this but Im the classic case of someone not taking an interest in their pension until their late 40's when retirement is looming on the horizon. I wish Id made AVCs etc 20 years ago!!

ussdave

What are your total USS benefits?  Retirement Builder (RB) and Investment Builder (IB) at current values.

If you plan to take both the RB and IB benefits together you will be able to combine their values for the purposes of calculating your maximum tax free lump sum (TFLS).  This may allow you to make significant tax savings at the point of withdrawal and therefore may make it more worthwhile to consider additional pension payments from your salary and/or transfer in from another pension fund (such as a SIPP).

For example, if you've got £20k RB and £200k IB the calculation would be as follows:

( (RB benefits * 20) + (RB lump sum benefit) + (IB total) )  * (25% TFLS)

( ( £20k * 20) + (£20k * 3) + (£200k) ) * (0.25) = £165k TFLS

Of that £165k, £60k would be made up of your standard RB TFLS and the other £105k would come from your IB funds, leaving £95k.

This remaining £95k is then considered an entirely separate pension pot, which you can either transfer or drawdown from.  Furthermore, 25% of this pot can be drawn as a TFLS as normal.

Despite the recent USS pension changes being terrible for current and new members, those with a significant RB benefit accrual can still make significant tax savings by loading the IB, even without salary sacrifice.

Albermarle

I read somewhere that I can only pay in £40k per year into a pension. Is that right?

Although your question has already been answered in various ways, just to make it crystal clear that the £40K includes all inputs into a pension ( employer contributions, tax relief etc ) , not just your contributions. 

Cornish_mum

You need to have earned everything you put into the SIPP and the USS scheme this tax year so if you have take home home that covers both contributions and the necessary AA carry forward I think it’s fine. 

But I am definitely not an expert just another USS member trying to backfill her pension. 

CM

Southend_2

dllive said:

Thanks all! Theres a lot here for me to digest. Ill get back to you if I have anymore questions if thats ok.

A couple of things:
1) I definitely cant SalSac contributions. Ive checked this twice with the Pensions Dept. Ive heard its almost universally done via SalSac so - given the institution I work for - I was very surprised to find out its not! (hence why I checked twice with the Pensions Dept!!)
2) This is the first year Ive made AVCs, so Im sure I can carry over the past 3 years of unused amounts. Ive got £30k in cash form this year's income to play with

Thanks all. Youve been very helpful as always!

My employer also won't allow sal sac for additional IB contributions. I also asked twice about it. The first reply was that HMRC don't allow it, the second which is more plausible, was that the employer's individual agreement with USS doesn't allow sal sac on additional contributions. Very annoying but not a lot we can do about it.