USS drawdown options in early retirement

Pythagorous

I'm considering early retirement options from the USS pension scheme. Ideally, I'd like to use my Investment Builder DC pot (and a Vanguard SIPP) to bridge the period until Normal Retirement Age, so the Retirement Builder fixed pension doesn't get hit with an early retirement factor (making long term planning more difficult).

Can you drawdown your Investment builder DC pot from age 57 without starting the Retirement Builder DB pension? Or do you need to also start the DB RB pension at the point you take early retirement (and hence get hit with an ERF)? 

I guess another option is to fully transfer the IB DC pot to the SIPP and use the SIPP to bridge, assuming this would work?

Essentially I'm trying to figure out how to optimise using my IB and SIPP pots as a bridge (I plan to use up all the SIPP and IB cash in the bridge period) whilst maximising the tax free cash.

NickBFS

No, you don't have to take the RB at the same time as the IB. You can draw from the IB from age 55 onwards, even if you do not take the RB yet. In fact, you could continue working and start drawing from the IB (although you would then potentially be subject to the MPAA ceiling for pension contributions but, if you intend to retire early and not engage in further paid employment, this would not be an issue for you).

Pythagorous

NickBFS said:

No, you don't have to take the RB at the same time as the IB. You can draw from the IB from age 55 onwards, even if you do not take the RB yet. In fact, you could continue working and start drawing from the IB (although you would then potentially be subject to the MPAA ceiling for pension contributions but, if you intend to retire early and not engage in further paid employment, this would not be an issue for you).

How does that work in terms of the TFCS @NickBFS?

This was being discussed in another thread, but I'm not 100% sure I understand how it'd work with an IB drawdown before the DB part (the post author mentions you sever the TFCS if you take the IB part earlier and hence seems to imply you may not utilise all your TFCS).  https://forums.moneysavingexpert.com/discussion/6439958/uss-vs-tps-university-pension-advice-needed#latest

NickBFS

Yes. IF you take the IB and RB at the same time, you can maximise the PCLS by combining the two. If you start drawing on the IB separately, you lose that possibility: you will get the tax-free part of the IB through the 25% tax-free of each UFPLS.

You will still get a TFLS when you start taking the RB but it will be based on the RB alone (i.e. 3xtimes your annual RB pension, assuming you don't commute any to extra PCLS).

If you wanted to take a TFLS from the IB other than the 25% of each UFPLS, you would have to go for flexi drawdown and crystallise some of the pension so as to take the TFLS. USS does not provide flexi drawdown, so you would have to transfer your IB to a SIPP that allows flexi drawdown.

Unless you need a large sum at commencement, however, it is not clear that you really need flexi drawdown if all you want from the IB is to drawdown a regular income to live on while waiting for the RB to kick in, in which case UFPLS might suit you just as well.

LL_USS

@NickBFS
Thank you for replying to my question in another thread. I am just asking here as I think I might have misunderstood something.
Say when we reach age 57 we have 80K in IB DC pot, I just use a number for illustration.
If i dont want to retire yet then and just want to get some lumpsum.

Certainly I can't get all 80K from the DC pot out even though when I use the formula of (DB income *3 + DC) *25% it is over 80K, as we don't retire yet at that stage to dip in the DB (??) sorry for my lack of understanding and terrible use of terminologies.

But say if we only need 20K (25% of the DC pot) then we still have to transfer this DC to SIPP to be able to withdraw 25% of the pot? Perhaps this is still considered flexi and not allowed by USS?

Again, apology if this is a silly question. 

Also, if I feel like my projected pension is okay for my future retirement, and I want to spend my salary for today (like helping kids), I only want to put in enough voluteer contribution for tax efficiency and decent TFLS. Should I keep an eye on the pots and adjust so the amount that my DC pot at the time of retirement is around the same as the 25% of the whole pot and thus I will be able to take out the TFLS as my whole DC pot and leave the DB drawn down gradually. Sorry, this is just an attempt to deal with money from a person with social science background.
Say my projected annual income DB = 20K (pretend number, mine is smaller than this).
My whole pension pot projected at 20K * 20 + 20K * 3 + DC = 20K *23 + DC
aiming to get the DC pot to be around the same as 25% tax free allowance from the whole pot

(20K * 23 + DC)/4 = DC
20K * 23 + DC = 4 DC

20K * 23 = 3 DC
So I should aim to have my DC pot to be about (20K*23)/3 = 153,333 at the time of retirement

Does this make any sense at all?

NickBFS

LLShef said:

@NickBFS
Thank you for replying to my question in another thread. I am just asking here as I think I might have misunderstood something.
Say when we reach age 57 we have 80K in IB DC pot, I just use a number for illustration.
If i dont want to retire yet then and just want to get some lumpsum.

Certainly I can't get all 80K from the DC pot out even though when I use the formula of (DB income *3 + DC) *25% it is over 80K, as we don't retire yet at that stage to dip in the DB (??) sorry for my lack of understanding and terrible use of terminologies.

But say if we only need 20K (25% of the DC pot) then we still have to transfer this DC to SIPP to be able to withdraw 25% of the pot? Perhaps this is still considered flexi and not allowed by USS?

Yes, if you want to withdraw 25% of your DC pot tax-free other than at the same time as the DB, you need to transfer it to SIPP as USS will only allow you to take UFPLS. So, if you were to withdraw 20K from your USS DC pot, 5K of these would be tax-free and 15K of these would be subject to income tax. If you want to take 25% of your DC pot tax free and leave the 75% crystallised rest in the pot, you have to do it via flexi-drawdown, which USS won't do, hence why you need to transfer it to a SIPP that allows it.

LLShef said:

Also, if I feel like my projected pension is okay for my future retirement, and I want to spend my salary for today (like helping kids), I only want to put in enough voluteer contribution for tax efficiency and decent TFLS. Should I keep an eye on the pots and adjust so the amount that my DC pot at the time of retirement is around the same as the 25% of the whole pot and thus I will be able to take out the TFLS as my whole DC pot and leave the DB drawn down gradually. Sorry, this is just an attempt to deal with money from a person with social science background.

Say my projected annual income DB = 20K (pretend number, mine is smaller than this).
My whole pension pot projected at 20K * 20 + 20K * 3 + DC = 20K *23 + DC
aiming to get the DC pot to be around the same as 25% tax free allowance from the whole pot

(20K * 23 + DC)/4 = DC
20K * 23 + DC = 4 DC

20K * 23 = 3 DC
So I should aim to have my DC pot to be about (20K*23)/3 = 153,333 at the time of retirement

Does this make any sense at all?

 See this post by MPLMPL in another thread on calculation of maximum that you can withdraw tax free from the IB if you take it at the same time as the DB.

So, to sum up the formula, the amount would be ((23X DB)/4 -3x DB)/0.75.
for a DB of 20K, this would mean:
((23X20K)/4-3x20K)/0.75 = (460K/4-60K)/0.75 = (115K-60K)/0.75 = 55K/0.75 = 73.33K

Anything left over 73.33K in your IB would be available for drawdown as UFPLS (or transfer to a SIPP for flexi-drawdown if you prefer)

MPLMPL

This formula simplifies to multiplication your DB income by 3.667 (or 11/3 if you prefer to use fractions).

LL_USS

MPLMPL said:

This formula simplifies to multiplication your DB income by 3.667 (or 11/3 if you prefer to use fractions).

Thank you @NickBFS and @MPLMPL

I've been trying to read the USS-options options options thread - really raking my brain. It is like studying another degree . I guess I will just try to understand it bit by bit. At any point when I am crying out loud "I don't get it" I will rest and get back to it later ;-). The thing is I don't trust paid financial advisor (the same as I feel the mortgage advisors I used in the past were not really helpful - I knew better what to do after trying to understand it and apply to my situation). So I will see if I can learn to deal with my pension and investments too. How come there are so many of us here knowing this SOOOOOOO well? I am still taking baby steps.

LL_USS

NickBFS said:

 See this post by MPLMPL in another thread on calculation of maximum that you can withdraw tax free from the IB if you take it at the same time as the DB.

So, to sum up the formula, the amount would be ((23X DB)/4 -3x DB)/0.75.
for a DB of 20K, this would mean:
((23X20K)/4-3x20K)/0.75 = (460K/4-60K)/0.75 = (115K-60K)/0.75 = 55K/0.75 = 73.33K

Anything left over 73.33K in your IB would be available for drawdown as UFPLS (or transfer to a SIPP for flexi-drawdown if you prefer)

I have this screenshot (I think from USS website) saying "you can usually take up to 25% of the overall value of your benefits and savings as tax-free cash at retirement. And if you take both your Retirement income builder benefits and Builder savings together, you can usually take all of your Investment Builder pot as tax-free cash (depending on the size of your pot). If your Investment Builder saivngs make up more than up 25% of the overall value of your benefits at retirement, you can still take some as tax-free cash and the rest can be taken using one of the other options on this page".

What I am calculating seems to be in line with the USS quote above

Say I have 20K/year and 153K DC pot at retirement age (the scenario I raised before )
My overall pot putting both DB and DC together: 20K*20 + lumpsum 20K* 3 + 153K = 460K + 153K = 613 K. 25% of this combined pot is 153K (exactly the same as the DC pot - hence my calculation for the ideal DC pot size to coincide with 25% of the whole pot to take out as TFLS, leaving the DB intact).
If, say, the DB is much smaller, like 5K/year then it becomes 5K *23 + 153K = 268K then 25% for TFLS = 67K. One could only take 67K from the 153K DC pot and leave the rest to invest further and draw down later.

Maybe you thought I was meant to ask about max lumpsum from DB? The formula you used only includes DB in the function; you extract 73.33K tax free whilst I combine both pots together and get 153K lumpsum, which is all from the DC pot.
My purpose is taking the TFLS from the DC, and leave the DB alone to get paid each year (20K a year - if I take out all the DC I still have this 20K a year right?). I am at a position to be able to SalSac more into the DC (and been advised to pile in as much as I can). I like the idea of moving more gross salary going to this DC pot (meaning a perk of reduced NI not just less tax as we still work) and if calculate right, I can take all this pot out tax-free too. But I don't want to pile in too much to DC because (1) not all of it is going out tax free if the DC pot is too big relatively to DB income/year, and (2) I need to keep some accessible cash now for investment in kids in the next few years. If the DC pot is very very big, of course it is still very good to keep investing and drawing down (paying tax) but I think I choose to put in "just enough".
So I keep an eye on my DB income / year projection and work out the "ideal size" DC pot to try to build it (after making sure I do have enough ready cash). The only trouble is the projection is in today's money and it will be different in real life in the future in absolute term.

Am I wrong somewhere ? If one takes a lumpsum from the DB, will it reduce their income for life part?
Sorry I have tried reading the other thread, hoping to understand some more but i got a little foggy brain and am pausing reading it for today.

EDIT: I have just found this on Aviva's website "Defined benefit pensions usually let you take a 25% tax-free cash lump sum in exchange for getting a lower income, and the conversion rate of pension to cash is dependent on the scheme's rules. However, you may have to give up a large amount of your income compared to the amount of tax-free cash you'll get". Someone in this forum already said the conversion rate is not great. I just put the info together to say I'll keep the DB intact as it is projected to be already small anyway, take the TFLS from the combined pot but essentially it is the DC - perhaps in a few years tim having an interest only mortgage to help my older kid to get a place then paying it with the lumpsum when I retire .

NickBFS

LL_USS said:
My overall pot putting both DB and DC together: 20K*20 + lumpsum 20K* 3 + 153K = 460K + 153K = 613 K. 25% of this combined pot is 153K (exactly the same as the DC pot - hence my calculation for the ideal DC pot size to coincide with 25% of the whole pot to take out as TFLS, leaving the DB intact).

It does not work like that. the maximum PCLS that you can take when you start your DB is 25% of the value of your DB. The value of your DB itself is 20xDB, to which we need to add the default lump sum of 3xDB. So, the maximum PCLS is (23xDB)/4. This is so, regardless of the size of your DC pot.

By default, USS will give you a PCLS of 3xDB. If you want to increase it to the maximum possible of (23xDB)/4, you can do it in two ways: you can commute some of your DB pension into extra PCLS (and therefore have a lower annual pension) or you can do it by crystallising (some of) your IB. If you want to achieve the maximum PCLS without lowering your annual pension, you must do the latter. Since you receive by default 3xDB, the portion of your IB being crystallised will be the maximum PCLS for the DB=(23xDB)/4 minus the default PCLS of 3xDB. There is, however, a tax free portion corresponding to the IB you are crystallising, hence the division by 0.75 to bring the total that you can withdraw tax-free. With your figures, this gives a maximum figure of 73.33K TFLS from the IB+60K default PCLS, and therefore a total PCLS of 133.33K

If you have 153K in your DC pot, 73.33K will be used up to bring your PCLS to 133.33K but you will still be left with 153-73.33=79.67K in your DC pot. 
That 79.67K will be uncrystallised and therefore still contain 25% of tax-free cash. If you take UFPLS, each UFPLS will be 25% tax-free. Alternatively, you could transfer the whole pot to a SIPP that allows flexi drawdown,  and take 79.67/4=19.92K tax free in one go, leaving you with 59.75K fully crystallised and no more tax-free element left.

The total amount of TFLS you will have got will be 133.33K (as PCLS) plus 19.92K (as TFLS withdrawn from the remaining amount in the IB transferred to a SIPP) = 153.25K, which is more or less the total sum of tax free cash you expected.

That, at any rate, is how I understand it but I leave it to more knowledgeable others, like MPLMPL, to correct me if I am wrong.

LL_USS

NickBFS said:

It does not work like that. the maximum PCLS that you can take when you start your DB is 25% of the value of your DB. The value of your DB itself is 20xDB, to which we need to add the default lump sum of 3xDB. So, the maximum PCLS is (23xDB)/4. This is so, regardless of the size of your DC pot.

Thanks NickBFS. This is one of the "Ahhhhhhh....." moments !!!

I understand now. The USS website says "25% of the overall benefits at retirement" - that is the "benefits" the employer promises you for the rest of your life, hence, based on the DB (20*DB/year + 3 times of DB lumpsum), independent of your DC - I see I see I see....

And how to take that max TFLS without reducing my annual income (60K from DB lumpsum and a part from IB pot), what happens to the rest - I see I see I see....

So I can tick the box of understanding the calculation based on this set of understanding (and yes we hope it is right. The pension terminologies and wording of rules are a minefield !!)

Sorry you have had to explain all the details using an example. Thank you for your patience. Really really appreciated

EDIT: So if I insist to work out an ideal IB pot that can I can take all out tax free then based on the new understaning you give it is:

(23*DB)/4 – 3*DB=DC

5.75*DB-3*DB=DC

2.75*DB=DC

That means to get all of the DC pot out tax-free, the size can only be 2.75 times the DB, in this case 2.75*20K=55K. Then the divided by 0.75 bit to make  73.33 K(I still need to settle my mind with this bit).  - NOT 153K in my old wrong understanding of total pot.

and of course the DB*3 = 60K too (i also wrongly thought taking this will reduce the 20K/year DB income- annual income only reduces when one takes 25% tax free from the DB)