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

ussdave

The more I think about it, the more I'm convinced I'm wrong on that last point.  I'll double check myself and update my post as appropriate.

ussdave

Okay, the USS site does not explicitly state things one way or another, so I think it would be reasonable to assume that you would not have a tax free element for money left over in the IB when you draw it.

I think where I got my idea that it was not the case was the fact that USS refer to these additional payments as UFPLS, which would suggest you *do* get 25% tax free (to my understanding at least).  Can anyone comment/correct this?

https://www.uss.co.uk/for-members/your-pension-explained/taking-your-benefits-and-savings

Obviously in hindsight it really doesn't make sense that you'd be able to double-dip the tax free element like this...

Tomatillo

Is it possible to pay into the IB and then move part of the 'pot' to a SIPP later on? That would allow you to benefit from salary sacrifice (if available) and the subsidised fees in USS but you could then move an amount to a SIPP to give you the bridge before you drew on your USS pension. I am not sure whether that would be possible.

swindiff

No need to transfer you can draw from age 55 without drawing your DB Pension.  The only downside to this is that the Tax free cash amount would only be based on the DC pot I believe and not include the "value" of the DB pension.

https://www.uss.co.uk/for-members/thinking-about-your-future/understanding-your-options/using-your-investment-builder-pot

Tomatillo

Thanks for that. I was wondering whether you could transfer the bridging amount to your SIPP and leave the rest in the DC part to take advantage of the tax free cash by taking it when you start drawing the DB pension?

ussdave

Tomatillo said:

Thanks for that. I was wondering whether you could transfer the bridging amount to your SIPP and leave the rest in the DC part to take advantage of the tax free cash by taking it when you start drawing the DB pension?

When I checked previously it was all or nothing with a transfer.  You could potentially achieve this by either timing your transfer (to allow enough time to build your pot back up to an amount to support your optimum TFLS) or by fully transferring out and partially transferring back in, though in either case you're potentially exposing yourself to more management fees

...though probably still worth it if I am wrong about the UFPLS post-commencement and you expect to have a large amount of IB funds left after drawing your TFLS.

swindiff

There is something else to consider if planning on retiring early and using a pot of cash to bridge the gap between stopping work and taking your DB pension.  I realise this may not be universally applicable, it will depend on your own contract of employment and circumstances.  In my case my normal retirement age when I started work for my university way back in 1989 was 65, but I could retire without actuarial reduction from the age of 60 with my employers agreement.  This only applies if I am still employed by the university when I start taking my DB pension, if I am a deferred member this age raises to 63 1/2, this also only applies to benefits built up before Oct 2011 when they made major punative changes to USS pensions.

So for example, if I was to stop working at 59, used my DC pot to live off until I was 60, then started taking my DB pension, the benefits built up prior to Oct 2011 would be subject to 3 1/2 years worth of actuarial reduction and the benefits post Oct 2011, 7 years worth of AR (assuming normal pension age for me by then is 67).

If I stop working at 60 and take my DB pension at the same time, with my employers agreement (and I have never heard of them not to agree), all my pre Oct 2011 benefits are not reduced at all.

This could have quite an impact on someones annual pension and is not really something that is obvious to many people.

MPLMPL

Tomatillo said:

Thanks for that. I was wondering whether you could transfer the bridging amount to your SIPP and leave the rest in the DC part to take advantage of the tax free cash by taking it when you start drawing the DB pension?

Yes, but as ussdave says, it's all or nothing, you have to transfer the lot out to a SIPP, you can't do a partial transfer. Once transferred you can continue to contribute to the IB to build it up again. Timing this transfer key.
I did exactly this about 6 months ago. Transferred my IB ~£150k to my SIPP and continue to salary sacrifice to just above NLW into my IB. By the time I retire in about 18 months, my IB should be at about the maximum I can get out tax free as a result of the link to my DB.
This then gives me the option of drawing on my SIPP and deferring drawing the DB portion. I'll take a look at the latest ERFs to decide. I think they are reviewed every 3 years and 2023 is a review year. Re swindiff's post, I have a fair chunk of my DB as pre-2011 final salary where ERFs only apply from 63.5. If ERFs are similar to the current ones, I'll probably take the DB early, but it's nice to have the scope to defer. I think that if I take it at 56 I would end up with ~76% of the full amount. 

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.

Here's the response I got from USS when I asked about this.  Annoyingly I incorrectly assumed I'd get an email copy of my query, so I can't provide the wording I used.  However, I did use the specific example and figures that I used in my reply above.

Dear USSDave

 

Thank you for your recent enquiry regarding your USS benefits.

 

I wish to inform you that  any Investment Builder funds not paid as part of your tax-free pension commencement lump sum upon retirement from the scheme would remain uncrystallised and could then be accessed as UFPLS payments after retirement.

 

For each payment taken in this manner the first 25% would be payable tax-free with the remaining 75% taxed at your nominal rate.

 

You may take up top four such payment over the course of a year, provided that each payment exceeds £2,000.

 

You may find the following link to our website regarding this matter of some help.

 

www.uss.co.uk/for-members/thinking-about-your-future/understanding-your-options/using-your-investment-builder-pot

ussdave

Tomatillo said:

Thanks for that. I was wondering whether you could transfer the bridging amount to your SIPP and leave the rest in the DC part to take advantage of the tax free cash by taking it when you start drawing the DB pension?

I don't seem to be able to tag you in my previous post so I've just quoted this to ensure you get a notification as I thought you'd find it useful.