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

dllive

ussdave said:

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.

Hi @ussdave . Youve given me a lot to think about! I thought I had enough to think about with contributions into my penions, let alone when it comes to getting contributions out of my pension! Lots of food for thought here.

Anyway, 

In your formula you have:

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

Whereas your example is:

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

Why are you multiplying the RB lump sum by 3? I plugged my figures into your formula and it seemed about right. My TFLS figure is closer to £40k rather than £165k, but then I started paying into a company pension late, and Ive got another 15 years (hopefully).

Also, when I take my TFLS of 25%, how does that work with my SIPP. Do I take my 25% TFLS from my USS, and then another 25% TFLS from my SIPP?

ussdave

dllive said:

ussdave said:

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.

Hi @ussdave . Youve given me a lot to think about! I thought I had enough to think about with contributions into my penions, let alone when it comes to getting contributions out of my pension! Lots of food for thought here.

Anyway, 

In your formula you have:

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

Whereas your example is:

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

Why are you multiplying the RB lump sum by 3? I plugged my figures into your formula and it seemed about right. My TFLS figure is closer to £40k rather than £165k, but then I started paying into a company pension late, and Ive got another 15 years (hopefully).

Also, when I take my TFLS of 25%, how does that work with my SIPP. Do I take my 25% TFLS from my USS, and then another 25% TFLS from my SIPP?

Hi.  Yes, looks like I typed that in a rush.  The RB lump sum benefit shouldn't be multiplied by 3 - what I meant to convey is that the RB lump sum benefit is calculated *by* multiplying the RB annual amount by 3.

If you have money elsewhere it may be worth considering transferring that money into the IB to increase your total amount of TFLS.  Have a play with different figures, including projections based on how much you are likely to pay in over those 15 years with your regular wage contributions.

In regards to your SIPP, it's entirely separate.  Generally speaking, each pension is treated as its own pot, with its own TFLS.  However, any taxable income from a pension beyond the TFLS is effectively added together when calculating how much tax you will pay.

dllive

Thanks so much @ussdave ! Youve been very helpful.

My current thinking (which may change!) is to make additional contributions to my SIPP. This is because - despite the additional TFLS benefit of USS - I feel USS will increase the bond allocation of the fund earlier than I would. Im quite happy to be 100% in equities until about 10 years from retirement. I dont want bonds to be a drag on my returns.

I know USS has a 'Let me choose' option, but I prefer Vanguards passive approach.

Also, I dont think Ill need a big cash amount when I retire. Any mortgages I have by then will be paid off, and Im certainly not lavish in my spending. (Its one of my oddities that Im a fantastic saver and a very bad spender! Probably because I grew up with no money).

I may change my mind! I have just shy of 30 days to make a decision!

ussdave

dllive said:

Thanks so much @ussdave ! Youve been very helpful.

My current thinking (which may change!) is to make additional contributions to my SIPP. This is because - despite the additional TFLS benefit of USS - I feel USS will increase the bond allocation of the fund earlier than I would. Im quite happy to be 100% in equities until about 10 years from retirement. I dont want bonds to be a drag on my returns.

I know USS has a 'Let me choose' option, but I prefer Vanguards passive approach.

Also, I dont think Ill need a big cash amount when I retire. Any mortgages I have by then will be paid off, and Im certainly not lavish in my spending. (Its one of my oddities that Im a fantastic saver and a very bad spender! Probably because I grew up with no money).

I may change my mind! I have just shy of 30 days to make a decision!

There are definitely advantages to concentrating on your SIPP as you can potentially use that to 'bridge' your income between an early retirement date and a date to take the USS pension benefits (thereby reducing or eliminating any early retirement reduction factors).

That said, I'd still consider putting at least some of your available additional funds into the USS IB.  The amount you'll save in tax over the course of 30 years will be significant and you don't have to spend any lump sum - you can simply reinvest it when you draw it.

Re the move to bonds/lifestyling point: you can "cheat" the system by telling USS you intend to retire at a later age.  I believe this will mean that the move to bonds/etc will occur later.  That said, I personally use "do it yourself" and have it set to 100% global equities.  I will start to purchase 'safer' funds as I get closer to retirement (I don't have 30 years like you do but nearly 20)

dllive

Thanks @ussdave ! Good tips there!

Cornish_mum

Hi

we are also cheating the lifestyling (as we have no intention of using the DC pot for annuities) by adding 10 years on to our target retirement age. 

This thread has been a very useful read. 

Thanks CM

dllive

@ussdave . I couldnt decide on the best course of action regards USS or SIPP, so decided to halve my lump sum into each!

Ive just paid my employer the lump sum for USS and entered the amount in the 'lump sum payment' field of my USS web page. 

However, Ive just had a thoiught!: Looking at past transactions it seems my AVCs are made on the 9th of each month. This means that it wont show on the transactions page until 9th Apri. Does that mean that the lump sum falls into 2024 tax year, even though I just made the payment?

Keith80

If it’s deducted from your end-March salary it should show up in your P60 for the current tax year, regardless of when USS actually invests it.

MPLMPL

ussdave said:

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.

Is the bolded statement correct? As the full £200k of the IB is used in your calculation, surely the remaining £95k is considered crystallised and subject to tax?
To get maximum IB out tax free here without crystallising the remainder, you would need to use £73,333 of the IB in your calculation. This would get £133,333 out tax free (£60,000 RB lump sum + £73,333 from IB), leaving £126,666 of the IB uncrystallised. This £126,666 could then be transferred out to a SIPP and if 25% of this taken tax fee, it leaves the £95,000 crystallised and subject to tax (ultimately the same outcome as if you crystallise the whole lot when taking the RB benefits). Of course, the whole £126,666 could be left in the SIPP uncrystallised.

ussdave

MPLMPL said:

ussdave said:

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.

Is the bolded statement correct? As the full £200k of the IB is used in your calculation, surely the remaining £95k is considered crystallised and subject to tax?
To get maximum IB out tax free here without crystallising the remainder, you would need to use £73,333 of the IB in your calculation. This would get £133,333 out tax free (£60,000 RB lump sum + £73,333 from IB), leaving £126,666 of the IB uncrystallised. This £126,666 could then be transferred out to a SIPP and if 25% of this taken tax fee, it leaves the £95,000 crystallised and subject to tax (ultimately the same outcome as if you crystallise the whole lot when taking the RB benefits). Of course, the whole £126,666 could be left in the SIPP uncrystallised.

I'm pretty certain it's correct but please do check up on it.  I was surprised by it myself when I learned of it.