USS vs TPS - advice needed

Synchrotron

Hi all,

I need some advice regarding university pensions. I am really not very savvy about this stuff, so any advice would be dearly welcome. I know there are a few posts about this topic in the forum, but every case seems to be different.

My situation is as follows. I started contributing to the USS scheme in 2013, so I have accrued just over 11 years, with no gaps. My initial salary was ~£30k, I am now near the top of the £40k band. I am in my early 40s, so I still have a long stretch before retirement.

In a few months I will start working at a post-92 university, which uses TPS, rather than USS. My contract will be for five years, with a possibility (but no guarantee) of a permanent post afterwards. By default, I would be enrolled into TPS, but I can opt to remain with USS instead. 

I know that, on paper, TPS is much better than USS, particularly after changes to the latter in the past few years, but I am not certain what the best choice is in my case. I have also seen some articles on how universities are concerned about the cost of TPS, so I don't know whether changes to that scheme might be looming.

I have a dependent, so one of my key concerns is making sure that they are in as financially secure a position as possible if anything happens to me. I will likely be a lifelong renter, so my other concern is that my pension be able to sustain me/us when I retire.

What would you do in my situation? Stay with USS or switch to TPS?

Is it possible to transfer all contributions from one scheme to the other at any point? Not just from USS to TPS, but also from TPS to USS, in the case that I contributed to TPS for five years, and then found another job at an institution that used USS.

Thank you in advance for your help!

ussdave

For new contributions I'd switch to TPS in a heartbeat.

I doubt transferring your existing USS is worthwhile though, as USS is no longer part of the public sector transfers 'club'.  Probably best to leave that where it is.

Universidad

I'd echo @ussdave's points above.

The accrual rate for TPS is 1/57 and the accrual rate for USS is 1/75

That means that to earn £500 of annual pension for each year in retirement, USS scheme members would need a salary of 37,500 per year. Meanwhile, TPS scheme members would only need a salary of 28,500. At the same salary you obviously earn more annual benefits in a TPS institution.

USS now has a lower (employee) contribution rate than TPS, but in some cases you're still going to spend more to get the same amount of benefit because of the difference in accrual rate.

Further, USS only tracks inflation up to a point. TPS tracks inflation (CPI) without a soft cap AND every year you remain active in the scheme actually increases above CPI (by 1.5%) which makes your earliest contributions (over a longer career) a lot more valuable than they might at first appear. (Less good if you do hop between USS and TPS a lot, though).

There are some plusses to USS that you should take into account, but I doubt they will make up a lot of the gap. Firstly, USS technically has a lower retirement age for benefits at the moment. 

Both TPS and USS are tracking the state pension age, but in different ways. In TPS your normal pension age is just whatever your state pension age is - and if it rises, so does the age at which you can take your benefits, across your whole CARE pension, including years already accrued. Right now that's probably 68.

USS normal pension age rises AS the state pension age rises. So right now it's still 66. It will go to 67 in a few years, and 68 eventually. But all the benefits you've earned up to now can be taken unreduced at 66 (or earlier) no matter what happens to state pension age later. So if you leave USS now and never go back, don't forget to retire at the right time.

Secondly, USS also has a default lump sum of 3/75 that you earn each year, so on our theoretical salary of 37,500, you'd earn in addition to an annual pension of £500, a one-off lump sum of £1500. There's no default lump sum with TPS, and though you can choose to take one the commutation rate from pension to lump sum is poor.

Finally USS also has some advantages around the DC portion of the scheme if you've been investing in that accidentally or on purpose.

I believe survivors benefits used to be better in USS than TPS in terms of percentage, but again the accrual rate may nullify that advantage. Death benefits (based on actual salary) may be better in USS.

I would take the TPS pension personally and it wouldn't involve a lot of maths, but there are lots of little things going on, as you can see.

It's *very* unlikely to be worth transferring to TPS in my opinion, but it's free to get a quotation, so you can find out without risk. If you do have benefits in the DC portion of USS, especially if it's a really small amount, it might be worth transferring those (and not the DB benefits at all), as this will vest your TPS pension, so you won't have to wait 2 years to know that you've got some TPS pension banked.

Synchrotron

Thank you both, that is extremely helpful!

hyubh

Synchrotron said:

Is it possible to transfer all contributions from one scheme to the other at any point? Not just from USS to TPS, but also from TPS to USS, in the case that I contributed to TPS for five years, and then found another job at an institution that used USS.

On the first part of that point: you can transfer from the USS into the TPS, and while it won't be a 'Club' transfer as others have noted, that doesn't mean the non-Club calculation will be 'very unlikely' to come out with a poor result simply by being non-Club - rather, the main factor will be the generosity or otherwise of the CETV from the USS. On the TPS side, the CETV will purchase additional pension that revalues as regular TPS pension does (CPI + 1.6% while in active service), which is notably superior to how a USS pension revalues. However the starting pension credit may be somewhat less than the deferred USS pension...

On the second aspect of the point, i.e. TPS to USS: transfers into the USS go into the DC section, not the DB one. Since the TPS as an unfunded public service scheme doesn't allow transfers out to money purchase pensions, that rules out transferring to the USS.

Universidad

hyubh said:
you can transfer from the USS into the TPS, and while it won't be a 'Club' transfer as others have noted, that doesn't mean the non-Club calculation will be 'very unlikely' to come out with a poor result simply by being non-Club - rather, the main factor will be the generosity or otherwise of the CETV from the USS. 

Totally correct, but it is from the perspective of USS's "generosity" in CETVs that I say it is "*very* unlikely to be worth transferring to TPS". 

My most recent CETV had a value of approx 7x the actual annual pension. There's only so much TPS can work with when you arrive at their doorstop with a pittance.