USS Retirement Options

atw_uss

Hoping for some thoughts from those in the know as I move forwards. I'm retiring this summer from a university role and will be taking my small USS pension. As I'll be 56, I'm obviously taking a hit on actuarial reduction (reduced figures below), but overall household income and savings make this very affordable. What I'm finding difficult to decide is which option to go for. I have a guidance call booked with Mercer (and also Pension Wise) in a couple of weeks, but trying to do as much homework as I can in advance.

I have four main options and have been looking at how the figures pan out over the years (- all figures are rounded for ease and anonymity):

1. Standard pension option = £10K + TFLS of £30K + £100K remaining in DC pot
2. Max pension option = £14K + £0 TFLS + £40K remaining in DC pot (I'm told this might be possible to take as a TFLS, need to ask)
3. Max TFLS option = £12K + £80K TFLS + £0 remaining in DC pot
4. Take an option between 2 and 3.

I've gone from thinking I understand it all, to doubting everything. Having initially dismissed Option 1, I'm now wondering if keeping the DC pot 'alive' could be beneficial, as I could potentially dip into it or buy an annuity if rates improve in the future. I should add that nearly £70K of the DC pot is made up of MPAVCs that I transferred in, so I can still use them to boost my annual pension DB income.

Any thoughts from the wise gratefully appreciated, including useful reading. Many thanks!

SMcGill

I have a deferred USS pension and I recently asked the forum for views on buying more pension using my TFLS as I didn’t need it. The general view was not to do that, instead take the TFLS and either invest it or buy an annuity with it. On that basis I’d discount your option 2, especially if you already have sufficient guaranteed income from other sources.

OldScientist

Sorry, I'm not providing any answers, but here are a few more things to think (ask USS about) about:

1) What fraction of your pension is pre-2011 (i.e., fully index linked), compared to inflation capped (at 5% full, and half inflation up to 15%). Fully index linked income is, of course, somewhat more valuable than the inflation capped.

2) If you buy extra pension is it allocated pro-rata to pre and post-2011 inflation protections or does it all become inflation capped?

3) What is the conversion rate from DC pot to DB pension you've been offered? At 55 years old, a single life annuity with inflation linked protection has a payout of about 2.8%, so a comparison will tell you whether the annuity route leaves you with higher inflation linked income.

4) You've not really described your wider position, but if you have other sources of guaranteed income (in addition to the state pension) or other investments/sources of cash, then these should also figure in your decision as well as your risk tolerance.

bluenose1

@atw_uss Not sure I understand that either.
I know that if you take your DB and DC  together you can increase the amount of your DC pot that you can take tax free so not sure which of those options is that. Not sure if you have to actually request it or they offer it automatically.
If your DB pension is £10k per year then the max tax free from your £100k DC pot would be approx £36,666.
That is what i am hoping to do when i retire. One of the experts on here provided a really useful calculation to do it which is on here somewhere.

Hopefully @swindiff or @ussdave will be able to advise.

atw_uss

Thanks @OldScientist and @bluenose1 - some good questions for me to ask USS when I next speak to them (we're practically on first name terms these days!).

Currently the preferred option is looking like 3, but I'm not sure whether it will work to take less annually and then leave some in my DC pot (I think £80k is the max TFLS and that involves converting some of the MPAVCs). This is how it was presented in the retirement quote, so I need to revisit the benefit tool again.

All quite confusing!

ussdave

So your MPAVCs are now transferred into your Investment Builder?  So presumably the commutation rates for purchasing extra pension with those funds will be the standard rates as per doing so with 'normal' Investment Builder funds (i.e. bad)?

Assuming the above is true then the maximum pension option (2) is bad, so discount it.

Related to option 1, keeping an Investment Builder pot "alive" is not advantageous.  The reasons being: 
1) You lose some of the tax free benefits by taking the money separately to the rest of your USS pension.
2) Even if you draw that money out as TFLS you can still reinvest it into a tax-free wrapper (e.g. ISA) or later purchase an annuity with the funds.

One thing I'm struggling to understand is why option 3 "max TFLS" also has a higher yearly payment amount and a lower IB amount.  That suggests to me that it involves some commutation, which (unless the factors have improved) you'd want to avoid.

I'd suggest the best choice is likely to be:
a) Max TFLS
b) NO commutation
c) Any "left over" IB funds retained as separate pot to be drawn on via UFPLS.

That will leave you with £10k/year (as per option 1), a very large TFLS of at least £60k and any remaining funds will be counted s an entirely separate pot of uncrystallised cash.  You can then draw money from that pot via UFPLs (so 25% of each withdrawal will be tax free) or transfer to a SIPP or buy an annuity at a future date if you want to.

bluenose1

That’s good to know your thoughts USSDave as that’s exactly what I intend to do. 

Doesn’t seem the options are very well presented by USS, learnt more on here than spending hours going through the USS information online.

atw_uss

Many thanks as always @ussdave - this is really helpful and confirms to a large extent what I was wondering about re. the max TFLS vs annual pension options,with any excess left in the DC pot. I need to speak to USS about this as it's not clear and the Benefit Conversion Tool doesn't seem to help much either!

I was also unsure whether annuities could only be 'bought' from existing pension funds. Annuity rates definitely better at the moment.

UPDATE: I’ve spoken to USS and they’re going to generate a new quote to include @ussdave’s suggestion. I think what might be complicating things is the £70K I have with MPAVCs in the DC pot that are an all-or-nothing commutation. 

ussdave

Could you get figures for the specific commutation rate for the MPAVCs?  It could be that they're good enough to consider as an option.  I would be surprised though, given how USS is these days

atw_uss

ussdave said:

Could you get figures for the specific commutation rate for the MPAVCs?  It could be that they're good enough to consider as an option.  I would be surprised though, given how USS is these days

I've asked and they said this could be included in the quote. I suspect they're not great, but we shall see!

atw_uss

UPDATE

USS have done a super quick new quote for me. I've added the new details into this as an amended Option 1:

1. Standard pension option (with max possible TFLS) = £10K + TFLS of £70K + £65K remaining in DC pot
2. Max pension option = £14K + £0 TFLS + £40K remaining in DC pot (I'm told this might be possible to take as a TFLS, need to ask)
3. Max TFLS option (with commutation of MPAVCs) = £12K + £80K TFLS + £0 remaining in DC pot
4. Take an option between 2 and 3.

I think I've ruled out Option 2 now, but still deliberating over the remaining options. I'think' the new option relates to the MPAVCs remaining in the DC pot (as they are an 'all or nothing' conversion, apparently), and the £70K TFLS made up of the standard TFLS and remaining non-MPAVC funds in my DC pot).

Hope this makes sense. I'm still not sure of the commutation rate so will ask again.

Many thanks for any thoughts on this @ussdave and others