USS Pension Options

Simes122

Tommy2024 said:

Simes122 said:

One thing I would say, is the USS default options are not great – hard to see that they’d be the right choice for anyone.

I'm planning to retire in July 2024 and have been trawling these USS threads and found them very informative to help my thinking, not least because of the contributions of @ussdave @MPLMPL and others.

The comment above jumped out at me because I think I might be one of those cases where one of the default options seem to the most obvious choice!

After much planning my minimum gross pension requirement is £35,000pa.

My USS retirement quotation says:

Annual DB pension £34,574, TFLS £103,722

Investment Builder DC pot £124,313

My default USS quotes are:

Max pension:  £37,835pa with £0 TFLS and £124,313 left uncrystallised in DC pot (70.51% LTA)

Max TFLS: £34,491pa with £229,942 TFLS and £0 left uncrystallised in DC pot (85.71% LTA)

The max TFLS option is close enough to my annual income needs (£35,000) and enables me to claim my entire DB and DC lump sums tax free on retirement.

The only other option would be to leave the DC pot of £124,313 invested by USS but my reading is that I would lose its initial tax free status (ie. I'd be subject to only 25% tax free on future drawdowns). I suppose the only scenario in which that makes sense is if the Investment Builder DC investment returns considerably outstrip whatever I might do with the £124,313 myself (eg. savings and/or shares). 

My (very rough) calculations suggest that to match an average 4% savings return from £124,313 over 10 years, then Investment Builder returns would need to average 7% over the same period, which seems quite optimistic.

Happy to be challenged over my thinking here to help me make the right final decision!

Many thanks

I don't have access to your detailed statements, so my figures are inaccurate relative to yours obviously.

But if you run through the modeller, and do things slightly differently, you can explore a couple of different ways you may wish to consider.

For instance, if you tell the modeller to preserve your DC pot entirely, you end up with the following (I think attractive option).  The figures will be higher for your I'm sure, as there are a couple of inputs I had to leave zero in the modeller and I wasn't sure of your ongoing contributions, or your exact retirement date.

The scenario where you preserve the entirety of your DC pot, reveals the following option:

Annual pension £30266

Tax Free Lump Sum £201,766  (this is entirely your RB Lump sum - we've not touched your DC at this point)

DC Pot remaning:  £124,313  

This can be taken obviously as an Uncrystallised pot, in stages, or all at once, and would provide you with a further £31k tax free, with the balance taxable at your marginal rate.  (So a total of £233k ish tax free) and around £325k available to you from your pension in total that you could invest!  That's at some cost to your annual pension of course (I think my figures are lower than you'll actually get as I don't know how much it'll rise until July).

Probably best you explore this option yourself under the Take Less DC Savings option (and in there, preserve the entirely of your DC pot, to see your actual figures based on your more detailed data.   USS do not readily provide this modelled option, but depending on your marginal tax rate in retirement, it can be quite beneficial to lower your annual pension, in favour of a little more tax free cash.   

You are different to me in that you have a long history of RB contributions.   Whereas, mine is relatively short, with a high level of DC contributions.   But the option may prove attractive to you.    It is to me as I'll be a HR taxpayer in Scotland in retirement, so anything I can do to reduce my annual income in favour of Tax Free cash is pretty beneficial as 0 tax, and the generous commutation rate in that direction is really much better than paying 42% tax!

NickBFS

Tommy2024 said:

Simes122 said:

One thing I would say, is the USS default options are not great – hard to see that they’d be the right choice for anyone.

I'm planning to retire in July 2024 and have been trawling these USS threads and found them very informative to help my thinking, not least because of the contributions of @ussdave @MPLMPL and others.

The comment above jumped out at me because I think I might be one of those cases where one of the default options seem to the most obvious choice!

After much planning my minimum gross pension requirement is £35,000pa.

My USS retirement quotation says:

Annual DB pension £34,574, TFLS £103,722

Investment Builder DC pot £124,313

My default USS quotes are:

Max pension:  £37,835pa with £0 TFLS and £124,313 left uncrystallised in DC pot (70.51% LTA)

Max TFLS: £34,491pa with £229,942 TFLS and £0 left uncrystallised in DC pot (85.71% LTA)

The max TFLS option is close enough to my annual income needs (£35,000) and enables me to claim my entire DB and DC lump sums tax free on retirement.

The only other option would be to leave the DC pot of £124,313 invested by USS but my reading is that I would lose its initial tax free status (ie. I'd be subject to only 25% tax free on future drawdowns). I suppose the only scenario in which that makes sense is if the Investment Builder DC investment returns considerably outstrip whatever I might do with the £124,313 myself (eg. savings and/or shares). 

My (very rough) calculations suggest that to match an average 4% savings return from £124,313 over 10 years, then Investment Builder returns would need to average 7% over the same period, which seems quite optimistic.

Happy to be challenged over my thinking here to help me make the right final decision!

Many thanks

My own situation is somewhat similar to yours, with a slightly smaller DB pension (32.4K by default) and a slightly bigger IB pot (around 160K) and also a retirement horizon broadly in the same time span (2025, rather than 2024). 

My own thinking has been pretty much along the lines that Simes122 outlines, i.e. commuting some of the DB pension into additional PCLS while leaving the IB pot intact (in my case reducing the DB pension from 32.4K to 28.2K in exchange for approx 90K additional TFLS). That works for me because:

1) the lower pension is still enough to cover my day to day needs (especially taking into account that the state pension will kick in in a few years) and the commutation rate (21.5) is reasonable; 

2) I am with an unmarried partner. If I were to die suddenly, my partner (who is my nominated beneficiary for my USS pension pot) would be paid the IB tax-free (if I die before 75) whereas it would become part of my estate and therefore subject to IHT if it was taken out of the pension wrapper as a TFLS and invested in an ISA (or outside any tax wrapper, for that matter). It therefore makes sense for me to leave the IB untouched for now. 

If neither of these things hold for you, I can see how the default max TFLS option might make sense in your case, especially as, based on your figures, it does not seem to involve commuting any part of the pot into additional DB pension (which is often what makes the default max TFLS option in USS particularly unattractive, as the commutation factor in that direction tends to be rather high). 

Tommy2024

Thanks @NickBFS and @Simes122, both very helpful perspectives!

Re: the modeller, in another thread I expressed my concern over the significant differences between the modeller and my written USS quotation, based on the same/similar assumptions (the USS quotation gives the higher figures). I tried to access back the modeller recently and find I now have no access to it, saying my circumstances are too complex for it! I did have a transfer in about 30 years ago, but other than that nothing too unusual I think!

But exploring a different balance of annual pension/TFLS is probably something I can roughly calculate on my own, based on the figures in my USS quotation. 

And the inheritance tax implications of drawing the entire DC pot aren't something I had previously considered and now need to - not least because I also have an unmarried partner. Leaving that aside, I am still having a bit of trouble bridging in my head the benefits of leaving any significant amount in the DC pot (subject to tax to some degree in future) vs taking it all now tax-free, but maybe I'm being a bit pessimistic over the average IB returns over the next 10-20 years!

Simes122

Tommy2024 said:

Thanks @NickBFS and @Simes122, both very helpful perspectives!

Re: the modeller, in another thread I expressed my concern over the significant differences between the modeller and my written USS quotation, based on the same/similar assumptions (the USS quotation gives the higher figures). I tried to access back the modeller recently and find I now have no access to it, saying my circumstances are too complex for it! I did have a transfer in about 30 years ago, but other than that nothing too unusual I think!

But exploring a different balance of annual pension/TFLS is probably something I can roughly calculate on my own, based on the figures in my USS quotation. 

And the inheritance tax implications of drawing the entire DC pot aren't something I had previously considered and now need to - not least because I also have an unmarried partner. Leaving that aside, I am still having a bit of trouble bridging in my head the benefits of leaving any significant amount in the DC pot (subject to tax to some degree in future) vs taking it all now tax-free, but maybe I'm being a bit pessimistic over the average IB returns over the next 10-20 years!

I think it’s worth you looking at the total amount you’ll be able to obtain tax free out of both sides and how much total you can extract out if your pension total.  It costs a lot of your total pension capital in some ways to take out all your dc pot tax free now.  In the example I outlined to you, your dc pot was entirely untouched yet still gave you a very large tax free sum.  And the dc side untouched, still has 25% tax free available to you.   And you can still invest either tax free extracted now or uncrystallised funds for growth.  Worth looking then at the total sums involved either way.

NickBFS

Tommy2024 said:

 Leaving that aside, I am still having a bit of trouble bridging in my head the benefits of leaving any significant amount in the DC pot (subject to tax to some degree in future) vs taking it all now tax-free, but maybe I'm being a bit pessimistic over the average IB returns over the next 10-20 years!

If you are not going to commute any of the DB pension, then it probably is a no brainer (subject to the potential IHT issue but I suspect that, on its own, it is unlikely to swing it). In that situation, I can't see any overwhelming reason not to empty the IB for max TFLS since your numbers align to avoid any commutation of the IB into DB pension.

The tax dimension presents itself differently, however, if you commute some of the DB pension into TFLS instead of taking it from the IB as you then reduce your taxable income. This is particularly relevant if you are going to be in a higher tax bracket (like Simes122) but this is also true as a basic rate taxpayer. In my situation (still in the 20% bracket), commuting part of my DB pension to max TFLS while leaving the IB untouched would mean paying roughly 1K less in income tax each year, in return for paying approx 13K extra in taxation of IB drawdowns at some point in the future (if I do draw the whole IB), so it would be a wash, tax-wise, after 13 years.

Tommy2024

Although not having access to the USS calculator, I have now managed to recreate @Simes122 estimate above on a spreadsheet and produced very similar numbers for a commutation of DB pension to higher tax free lump sum:

DB pension pa £30,316 (was £34,491).

DB tax free lump sum £202,100 (was £105,630).

DC pot left intact £124,313 (was withdrawn tax free).

This produces a small increase in LTA value £932,732 (was £919,772).

Also a slight increase in overall tax free sum (including future drawdown of DC pot) £233,178 (was £229,943).

As far as I can see, my tax position would look like this:

Tax on future DC pot drawdown:

 - Investment Builder £124,313

 - taxable sum 75% £93,235

 - tax basic rate 20% £18,647

Tax saving on reduced pension (assume basic rate tax, full personal allowance):

 - tax c£34k pension £4,384

 - tax c£30k pension £3,486

 - total saving pa £898

 - payback period for tax on DC pot = 21 years (so not quite so beneficial as @NickBFS example).

My reading of my position is that I could go either way on this, depending on how I want to access/use the capital. But there does seem a risk on the lower pension model if I needed to access my DC pot in larger chunks in future, as I could end up paying 40% tax on the drawdowns which would obviously be detrimental overall.

Either way, a really useful exercise to go through, I feel a lot more informed, really grateful for the help and suggestions! 

NickBFS

Tommy2024 said:

 - payback period for tax on DC pot = 21 years (so not quite so beneficial as @NickBFS example).

The difference between your figures and mine prompted me to check my calculations and I realised that I got it wrong (referenced the wrong cell on the spreadsheet). My figures are in fact more aligned to yours (i.e 21 years rather than 13).

Tommy2024 said:

 But there does seem a risk on the lower pension model if I needed to access my DC pot in larger chunks in future, as I could end up paying 40% tax on the drawdowns which would obviously be detrimental overall.

And of course there is also the basic risk of risk of investments in the DC pot underperforming to be weighed against the risk of having USS pension indexation not keeping up with inflation (either because of high inflation or scheme rules on pension indexation being changed again).