USS pension - some newbie advice for Investment Builder

gardenharrison

Hello, I’m hoping some people with more expertise on this can help me start to get my head around things. (I’ve read a lot about USS on the forum already and benefited a lot – thanks!)

 

I’ve come into £20k to invest. At the same time, I have been aware for some time in the that I should probably be building up my pension more. I’ve got a vague notion that I’d really like to retire as soon as realistically possible (don’t we all!). I will try to find a suitable IFA to help me generally on planning, but in the meantime:

 

I’m about 40. Have paid into USS pension since 2013. I’ve had continuous employment since then, just making whatever the default contributions are. I’ve not done anything active with the Investment Builder (although I know some of my payments ‘tip into’ that over a threshold). I’ve fairly recently become a higher rate taxpayer.

 

I really need to keep things simple as regard finances generally. Anything more is completely beyond me, realistically.

 

My assumption would be that a sensible approach to my £20k would be essentially to ‘drip feed’ that into my pension through my pay, as an ongoing Investment Builder contribution over a year. Because that would benefit me in terms of the tax side of things, as well as obviously bolstering my overall pension. So perhaps having £1600 go from my gross pay into the pension Investment Builder every month for a year.

 

I would do something low risk with the £20k in the meantime, put it in an easy access ISA or similar. So that I can get some interest on it, but have capital to hand if an unexpected cost comes up. As time goes on (once my ongoing income ‘catches up’ with my £20k extra pension contributions, if you see what I mean) I can see how things are looking. I might be able to invest more into the IB, or maybe I'll need access to the money.

 

Also, I understand that for the Investment Builder I should manually change how it’s being managed, to avoid it being low risk/low return by default, given I’m still decades from retirement. Is that right?

 

I would welcome any advice around this to steer me in the right direction.

ussdave

Your plan sounds like a sensible one to me.  A few extra details would help a bit though.

1. Are you able to contribute by salary sacrifice?
2. What is your actual salary?  You may gross enough for HR tax but possibly your existing pension payments already bring your net pay below the HR point.
3. What are your actual existing Retirement Builder and Investment Builder figures?
4. Are you planning to retire early, change jobs or any other major life events that are worth considering at this point?

ussdave

Apologies, didn't address your question re investments.

Personally I've tweaked the default options (currently 100% global equities for all new contributions).  For me this made sense as I'd done a bit of research into the pros and cons and am comfortable with the potential for my pot value to swing wildly up and down.  

If you're happy to do a bit of reading then I'd say it's worth moving from the default lifestyling approach USS uses.  If you find the idea of that too daunting then you may want to leave the investment choices as is for now.  At the age of 40ish you'll probably be in the growth or high growth funds, which are reasonable choices with a lower risk profile vs my choice of global equities.

gardenharrison

That's so helpful, thanks Dave. I will get back to you on your queries tonight

swindiff

I am invested in Global Equities and the Sharia fund which has done particularly well since the IB was launched.

gardenharrison

USSDave, thanks for your comments again and to reply to your questions:

1. Are you able to contribute by salary sacrifice?

Yes (so I pay directly out of my gross pay)

2. What is your actual salary?  You may gross enough for HR tax but possibly your existing pension payments already bring your net pay below the HR point.

gross salary is about £75k/year

3. What are your actual existing Retirement Builder and Investment Builder figures?

Retirement builder: about £6k pension, about £18k lump sum

IB: apparently "total savings" are about £4k

4. Are you planning to retire early, change jobs or any other major life events that are worth considering at this point?

No major relevant life events (we own our home already, for example). Except a vague sense that I would like to get myself into a position to retire well before state pension age if at all possible. (This is first dipping toe into those waters. I recognise there's a lot more research I'd need to do to understand the possibilities better. Also need to win the lottery or similar...)

Many thanks again!

gardenharrison

And I suppose one related, probably really stupid, question is about the idea of making contributions to the IB with a view specifically to getting myself down into the lower tax band. Is it as simple as working out my gross salary minus the higher rate start point, and dividing that by 12? And using that (or more) as the amount per month?

I tried to use a calculator on the USS members area that seemed to say it would advise me on this sort of question, but the details it provided seemed pretty incoherent (the % benefit didn't seem to change whether I said I was going to invest £10 more, or my whole monthly salary)

NickBFS

gardenharrison said:

And I suppose one related, probably really stupid, question is about the idea of making contributions to the IB with a view specifically to getting myself down into the lower tax band. Is it as simple as working out my gross salary minus the higher rate start point, and dividing that by 12? And using that (or more) as the amount per month?

Yes, exactly that, although you do need to take into account the contributions that are automatically deducted (plus whatever other pre-tax deduction, if any, such as cyclescheme, etc...). Look at your taxable salary on your monthly pay slip. Multiply that by 12 and subtract the current higher threshold (50270) and then divide by 12 to get a monthly amount of AVCs. 

You can also vary it during the year as long as you end up with the same total amount at the end of the year. So, it you start to increase your pension contribution in the middle of the tax year, you may want to temporarily increase the rate until the end of the year

If contributing via salary sacrifice, you can get further into optimisation so as to maximise NI savings by alternating a period of minimal deduction and of maximal deductions (as discussed in this thread) but that is the icing on the cake. For tax, just keep your taxable salary (=pensionable salary minus pension contributions for most) below the higher rate threshold.

ussdave

Given that you're not planning to retire super early (I'm guessing from what you've said you'd be happy if you could go as early as 60?) and given your salary and ability to use salary sacrifice, I'd say it's a no brainer to hammer extra Investment Builder payments as much as you can.  That's something you can do immediately.

In the near term I'd do a bit more research about the pros and cons of a higher focus on equities in relation to your almost 20 years to retirement.  You may conclude you want to go more equities heavy with your IB investments.

Then in the medium/long term you may want to consider transferring all (at that point in time) of your IB funds to a separate SIPP, before topping the IB back up again from salary up to the point of retirement.  The potential benefit here is you can use the SIPP to bridge years before drawing your USS pension, therefore reducing any early retirement factors.  The reason to top the IB back up before you stop working is so you can still benefit from the maximum tax free lump sum.

bluenose1

I really like USS Dave’s suggestions.
I put the maximum I could into USS investment builder from my 50s without a clear plan when to retire, it’s a great way of saving for your future self if you don’t need the money now. Having that money there has allowed me to retire from work (57) and it’s a great feeling to be the one in control.
Though appreciate at 40 you are faraway from that. With hindsight  I wish I had the foresight in my 40s to save more as ideally would have liked to have retired early 50s.
To do that I would have had to not only to save in my investment builder but also in ISAs to cover until could withdraw from my pension.

Would also be worth considering your partners pension provision as well.