USS pension (hybrid DB/DC scheme) - how much do I need?

What_time_is_it

I'm a contributing member in the USS pensions scheme. It's a hybrid scheme with a DB average earnings core, and a flexible element of DC where I can add in additional AVCs. I'm 46 now, and hoping to retire before I'm 60. I will have no mortgage on my home at that point. I live with my partner, (same age) no kids. The scheme allows for benefits to be taken up to 10 years before state pension age, so 60 might be earliest possible!

My question is, how much do I need to build up in the DC "pot" in order to retire early? 
Currently I have built up £9,300pa in the DB scheme and this increases by around £600-£800 per contributing year. This also comes with a lump sum of 3x the annual value - so currently £28k. I have also built up around £90k in the DC pot.

How much DC should I be aiming for? And how much is the DB "worth"? (e.g. multiply it by around 25 to get to an equivalent DC value?)

Anyone familiar with these hybrid schemes and how to plan with them?

Simes122

USS pension holder here.

As it's a hybrid scheme you can take DB and DC benefits together in various permutations and combinations to maximise your TF lump sum.   Because of the changes in USS, your DB contributions are now capped to the lower 40k of your salary, with contributions above that going to your DC pot.   So it's more likely to be the lower end of your £600-800 range, but does get reviewed each year with CPI.

Your standard lump sum if taking it as a hybrid amount can be different - you can generally take about 6.66 times your annual pension amount with your DC pot making up the balance after your standard lumpsum, and what's left in your DC pot after that, is uncrystallised, so can be taken 25% tax free, with the balance at your marginal rate.

On current levels, you have 9300pa so without commutation, the max TFLS will be about £62k from the hybrid scheme, £28k from your standard lump sum, and £34k from your DC (approx).   What's left in your DC will be uncrystallised, and can be taken 25% TF, balance at marginal rate.

You are like me in that your DC fund is decent and bigger than you need.   So keep squirrelling away into that via sal sac, as much as you can - up to £60k a year annual allowance.  

How much you need, depends on how much you want to live on in retirement.   Obviously you'll have your DB as your base income, and then you'll need to use what's left in your DC pot to bridge till state pension age.   As you are 46 now, then say you had 12 more years till early retirement at 58 say, you can boost your DB part by around £600 pa (around 16k).   That would then allow you to take just under £107k entirely tax free from the hybrid scheme.  (6.666 x 16k) as long as you have sufficient funds in your DC pot (which you do).  

There are different ways of working this out, and some great advice on the forums.   But thing to remember, you can take different permutations and combinations of DB and DC to max pension, max TF and any combination in between.   But as a rule of thumb, 6.666 your base pension (as long as you have sufficient DC funds) is the max TF you can get out.  Cheers, S

What_time_is_it

Thanks @Simes122. That's really useful and helpful information.

As you say, I'll be squirreling away as much as I can into the DC pot each month. As my salary is around £45k a year I don't have to worry about an upper limit - in fact the only limiting factor is ensuring that my salary remains above the National Minimum Wage threshold each month. 

I'd be interested to know how much you think I need to have in my DC pot at, say, 50 (4 years time), 55 (9 years time), and at 60 (14 years time, and my likely retirement age assuming that state pension age rises to 70 in the next decade)?

Tomatillo

Do make sure that you are planning on the basis of the current USS rules and not the old ones. The numbers in your OP (£600-£800 accrued per year) sound very like the old rules where you would accrue 1/75 of your salary up to a threshold in the mid £50k (e.g. £55k/75 = £733 pension a year). That has now reduced so that you get 1/85 of a lower threshold. In the year just finished that meant that the maximum you could accrue would be £40k/85 = £470 pension a year. Of course you also have an uplift for inflation so the acutal annual pension will increase by more than £470 pa but this is not an increase in real terms. In fact the inflation protection is now very poor (2.5% cap on inflation from next year for all years since the reform) so you have a risk that the value of your benefits will erode over time. 

That is all quite depressing but the reforms are apparently under review so there is a prospect that it will improve. 

Tomatillo

What income to you aim to have in retirement? It's a very personal thing so no-one can really give a view on how much you might want to get in your DC pot without knowing what your aim is. 

What_time_is_it

Thanks @tomatillo.
I'm taking the, perhaps optimistic view, that the recent changes to USS will be reversed so that it reverts to a 1/75th scheme with no inflation cap. 
I'd like to have an income at retirement of perhaps £2k - £2.5k per month after any taxes. Anything above that would be a bonus really. Don't want to leave anything behind either!

Tomatillo

Hopefully that will happen! Before the reforms the inflation protection was full protectio to 5% and then half of anyhting up to 10% (i.e. max of 7.5%) so still at risk of erosion in times like this but much stronger protection. I doubt the scheme will go to no cap at all. 
Are you taking the state pension into a/c in that £2-2.5k?

What_time_is_it

Agreed. Yes, it seems likely that the cap will be similar to the pre-2022 levels. 
I'm assuming (hoping!) I'll get the maximum state pension, but probably not until 70. So, yes, I'm taking that into account from 70 upwards. Therefore I'll need less from USS after age 70.

Simes122

Oh something else to factor in.  Your USS pension figure assumes normal retirement age.  I think you are being pessimistic at 70 for yourself, but at least you are being conservative rather than optimistic.   The problem comes when you take the USS pension early - there is an Early retirement factor applied as set out here:  Download A guide for IFAs

Eg at 10 years early, you will only get 70.1% of that £9k figure above for example.

What_time_is_it

Thanks @Simes122
I'll factor that in too. Sounds like a good trade off though - 10 extra years of DB pension at a cost of 30% of the annual value.

Tomatillo

Just on that point. I'm not sure how long you've been in the scheme but if you look on page 18 of the document that Simes linked you'll see how the retirement ages have changed over time. My understanding is that the benefits you've accrued retain the retirement age at the point they were earned. So e.g. anything you accrued between 2011 and 2020 the retirement age was 65 so the ERF only applies below that age. That means that the ERF will be lower than you might otherwise think if you've been a member for a while. Your pension doesn't increase for taking it later than that date. 

I hope that's right!