Weighing up USS retirement options

NickBFS

I am currently 60 and thinking of retiring early at 62.  I have been playing around with the calculators on the USS site to see what my options were.

If the calculators are correct, the baseline if I were to retire at 62 would be:

For the DB portion of the scheme (RIB): 28.9K annual pension + 86.7K PCLS

For the DC portion of the scheme (IB): 137.7K

A quick optimisation to maximise the PCLS while keeping the same annual pension of 28.9K would increase the PCLS to 192.6K and leave only 31.8K in the IB. Let's call this option 1.

Option 2 would consist of maximising the annual pension by commutating some of the PCLS but the CF is unattractive (the figures produced by the USS benefit conversion tool indicate a maximum annual pension of 31.9K with a PCLS of 137.7K and nothing left in the IB, so giving up 86.7K for 3K of additional annual pension, i.e. a CF of 28.9). I have therefore ruled this option out.

At the other end of the spectrum, option 3 would consist of minimising the annual pension. By contrast to option 2, the CF is more attractive: the USS benefit conversion tool suggests that, if I reduce the annual pension to 25.1K (the minimum possible), I could then get a PCLS of 167.6K with the IB fund remaining intact at 137.7K, so an overall total of 167.6 PCLS+137.7 IB = 305.3K (so gaining 80.9K in return for giving up 3.8K of annual pension, i.e. a CF of 21.2). If we take into account the fact that option 3 involves an extra 105K remaining in the IB compared to option 1, and therefore potentially subject to taxation on drawdown, the gain reduces from 80.9K to circa 65K. However, if we also factor in the extra tax on the pension side with option 1, the net extra per year is 3K instead of 3.8K. So, all in all, we still remain with a CF between 21 and 22.

My initial reaction was that option 3 was a no-brainer. After reflection, I am not so sure and the choice between option 1 and 3 seems to me more evenly balanced than I had at first impression. That said, option 3 still seems to me to have the edge over option 1.

I have no kids but I have a partner to whom I am neither married nor in a civil partnership. option 3 would enable me to keep the IB pot for transmission tax-free to my partner if I were to die before 75. Even if I were to spend the pot rather than keep it for transmission purposes, option 3 still looks more attractive: if I were to withdraw the extra 80.9K at a rate of, say, 5K a year (which would give me roughly 1.25K extra per year net after tax compared to the increased pension under option 1), this would probably run out in my early 80s on an assumption of investment return at 2% above inflation. At present, life expectancy for men my age is 84. Even if I were to live well into my 90s (1 in 8 chance, apparently), I would have thought that my expenses would slow down in my 80s so that the reduction in income would not be an issue. An annual pension of circa 36K (25.1K USS +10.6K state pension) should be enough to live on at that stage in life. It may in itself not be enough to cover care/nursing home costs should the need arise but neither would the increased pension under option 1 anyway. Given that survival rates for men in their 80s and 90s in care homes are typically in the 2 to 3 year range, this is the kind of thing that sale of my home (or downsizing/equity release if my partner is still alive at that point) when moving into the care home should be able to address if required, if the other pots are exhausted at this stage. I have also not considered what I would do with the other 225K but I don't think that this has an impact on choosing between option 1 and 3 so I can leave that undecided for now.

Does this hold together or are there clear errors/flaws in the above analysis?

bluenose1

There have been a few discussions on here re USS as the options they provide aren’t very clear.
As you have both a DB and DC. pot you should consider  taking them at the same time as it increases the tax free cash in your DC pot without reducing your DB income.
The problem is they don’t do this quote automatically which seems bonkers to me as most people wouldn’t be aware. 
You would require a quote for
a) Max TFLS
b) NO commutation

This thread is well worth a read as gives worked examples
https://forums.moneysavingexpert.com/discussion/6287299/uss-options-options-options-what-to-do/p1

NickBFS

Thanks for the heads up on the other thread. Interesting indeed.

I have not bothered yet getting a formal quote from USS. At 2 years out, it would not be accurate, especially as it would not incorporate the changes to the rules of the scheme expected to kick in next April.  So I have just used the calculators on the USS website: the 'benefit illustrator' to calculate the expected benefits for a retirement at 62 and the 'benefit conversion tool' to compare various options re TFLS.

The benefit conversion tool gives me a max TFLS without commutation of 192.6K, leaving 31.8K in the IB (that is option 1 in my first post). I was expecting a TFLS slightly higher: (20*28.9+86.7+137.7)/4=200.6K. However, the 192K matches the maximum TFLS using MPLMPL's method of calculation in the other thread. I will need to sit down and think a little harder to understand it, but I am proceeding on the assumption that MPLMPL and the calculator are right. In any event, whether it is 192K or 200K does not make much difference to the question of choosing between option 1 and option 3, i.e. whether or not to commute annual pension into TFLS, which is the question I am struggling with.

I don't have an urgent need of cash that could not be accommodated without commutation so both options could work for me in any event. It is really about determining whether one seems better than the other.

I have not drawn a tentative retirement budget but, at the moment, taking into account mortgage payments and AVCs to the IB (both of which will largely disappear in retirement), I take home in the region of 2K net monthly. The reduced monthly pension with max commutation + State pension would give me in the region of 2.6K net monthly (versus 2.85K monthly without commutation), so more disposable income than I have now. My reckoning is that 2.6K monthly should be OK in my 80s and 90s and that an extra 0.25K monthly would not make a huge amount of difference anyway at that age, so I might as well go for the maximum commutation.