Worth transferring from USS Investment Builder to SIPP?

Pythagorous

I currently have a SIPP with Interactive Investor, fully invested in Vanguard's VWRP global fund. This fund is an index ETF that seeks to track the performance of the performance of the FTSE All-World Index. It costs, I believe, 0.22% pa plus some small annual fee to Interactive Investor (about £200 pa, I think for them to manage the SIPP).

I also currently pay heavily each month from my salary into my USS investment builder (DC) pot. I invest everything into the global equities fund to try and get similar global diversification. I believe there are no fees at all on the USS fund.

However the exact composition of the USS global equity fund is a little bit vague: "Aim of fund: To rise or fall in line with the benchmark, which represents equities in companies across the world. The fund will mainly invest in shares in companies across the world, including emerging markets. The returns generated by overseas equities are not currency hedged, so may be impacted by currency movements. The fund is passively managed." 

It states its composite Benchmark as: 
Solactive USS Developed Markets Climate Transition Benchmark (92.00%), MSCI Emerging Markets Index (8.00%).

So I'm wondering how similar the USS global equity fund is to the Vanguard VWRP ETF fund and hence if it's perhaps worth moving some or all of the USS IB fund over to the SIPP even with the 0.22% fee?

Any thoughts?

Marcon

Pythagorous said:

I currently have a SIPP with Interactive Investor, fully invested in Vanguard's VWRP global fund. This fund is an index ETF that seeks to track the performance of the performance of the FTSE All-World Index. It costs, I believe, 0.22% pa plus some small annual fee to Interactive Investor (about £200 pa, I think for them to manage the SIPP).

I also currently pay heavily each month from my salary into my USS investment builder (DC) pot. I invest everything into the global equities fund to try and get similar global diversification. I believe there are no fees at all on the USS fund.

However the exact composition of the USS global equity fund is a little bit vague: "Aim of fund: To rise or fall in line with the benchmark, which represents equities in companies across the world. The fund will mainly invest in shares in companies across the world, including emerging markets. The returns generated by overseas equities are not currency hedged, so may be impacted by currency movements. The fund is passively managed." 

It states its composite Benchmark as: 
Solactive USS Developed Markets Climate Transition Benchmark (92.00%), MSCI Emerging Markets Index (8.00%).

So I'm wondering how similar the USS global equity fund is to the Vanguard VWRP ETF fund and hence if it's perhaps worth moving some or all of the USS IB fund over to the SIPP even with the 0.22% fee?

Any thoughts?

Have you looked at the quarterly investment report, available in the My USS section?

Pythagorous

Marcon said:

Pythagorous said:

I currently have a SIPP with Interactive Investor, fully invested in Vanguard's VWRP global fund. This fund is an index ETF that seeks to track the performance of the performance of the FTSE All-World Index. It costs, I believe, 0.22% pa plus some small annual fee to Interactive Investor (about £200 pa, I think for them to manage the SIPP).

I also currently pay heavily each month from my salary into my USS investment builder (DC) pot. I invest everything into the global equities fund to try and get similar global diversification. I believe there are no fees at all on the USS fund.

However the exact composition of the USS global equity fund is a little bit vague: "Aim of fund: To rise or fall in line with the benchmark, which represents equities in companies across the world. The fund will mainly invest in shares in companies across the world, including emerging markets. The returns generated by overseas equities are not currency hedged, so may be impacted by currency movements. The fund is passively managed." 

It states its composite Benchmark as: 
Solactive USS Developed Markets Climate Transition Benchmark (92.00%), MSCI Emerging Markets Index (8.00%).

So I'm wondering how similar the USS global equity fund is to the Vanguard VWRP ETF fund and hence if it's perhaps worth moving some or all of the USS IB fund over to the SIPP even with the 0.22% fee?

Any thoughts?

Have you looked at the quarterly investment report, available in the My USS section?

Yes, it says its invested in the LGIM Climate Tilted Global Developed Markets Equity & Blackrock Aquila Connect Emerging Markets. I'm still not sure how this compares to the FTSE All-World Index (which is what Vanguard's fund aims to track)/

Southend_2

Note that you can use the IB to fund a larger than normal tax free lump sum on retirement. You should factor this in before transferring (as well as the fees) as it could tip the balance against. 

Pythagorous

Southend_2 said:

Note that you can use the IB to fund a larger than normal tax free lump sum on retirement. You should factor this in before transferring (as well as the fees) as it could tip the balance against. 

Yes, I'll leave at least 3.67 times the DB pension in the DC pot to maximise the TFLS. 

I presume I can take tax free cash from the SIPP as well as long as I don't breach the £262k cap overall? My goal is to get the full £262K TFLS, by eventually getting my overall pension pot to the 1.04m value. However most of the value of my pension benefits will be in the DC/SIPP side. I understand commuting the pension from the lump sum, can help with this as well.

FIREmenow

Hiya, I have looked into this myself so some of my previous threads might help.

There are three keys things to know about the DC part of USS:
- as you say, there are no fees, ocfs are subsidised by employers in full (currently). 
- you can only transfer your whole pot out of USS, no partial transfers.
- the main advantage of our hybrid pension is that you may be able to take most, if not all, of your DC pot tax-free when taken combined with the retirement income builder as a Pension Commencement Lump Sum. This is because the 3x auto lump sum is nowhere near the 25% tax-free permitted and you can share that across both parts of the pension.

Based on these, when deciding whether or not transferring your whole DC pot to a SIPP is a good idea, you might want to consider how close retirement is and whether you would have time to fill it up again to make the most of the tax-free Pension Commencement Lump Sum.

If you transfer it out and draw it down from your SIPP, you will have the usual tax-free amount but then be taxed at your marginal rate on the rest. So considering fees, performance, and future tax is worthwhile.

I will be transferring my DC pot out this year, but I am decades away from retirement age and know I can build it back up in time. The SIPP will help bridge early retirement without drawing the USS pension early. I aim to transfer it out a few times until a point where I need to stop and let it grow. As all my contributions are salary sacrifice, it's better to do this than put it in a SIPP directly. 

If you are happy to give more info - age, planned retirement date, current annual pension accrued and lump sum, and value of the DC pot, we can give you a better idea - there are a couple of USS members here and some have taught us all a lot about making the most of USS!

This isn't what you asked, but thinking about it might result in gritting your teeth and staying with USS for the tax-free cash! I think about 8% of members move away from the default investment options, so I doubt there is much motivation to make the DIY investment options very sophisticated or transparent.

Marcon

Pythagorous said:

Marcon said:

Pythagorous said:

I currently have a SIPP with Interactive Investor, fully invested in Vanguard's VWRP global fund. This fund is an index ETF that seeks to track the performance of the performance of the FTSE All-World Index. It costs, I believe, 0.22% pa plus some small annual fee to Interactive Investor (about £200 pa, I think for them to manage the SIPP).

I also currently pay heavily each month from my salary into my USS investment builder (DC) pot. I invest everything into the global equities fund to try and get similar global diversification. I believe there are no fees at all on the USS fund.

However the exact composition of the USS global equity fund is a little bit vague: "Aim of fund: To rise or fall in line with the benchmark, which represents equities in companies across the world. The fund will mainly invest in shares in companies across the world, including emerging markets. The returns generated by overseas equities are not currency hedged, so may be impacted by currency movements. The fund is passively managed." 

It states its composite Benchmark as: 
Solactive USS Developed Markets Climate Transition Benchmark (92.00%), MSCI Emerging Markets Index (8.00%).

So I'm wondering how similar the USS global equity fund is to the Vanguard VWRP ETF fund and hence if it's perhaps worth moving some or all of the USS IB fund over to the SIPP even with the 0.22% fee?

Any thoughts?

Have you looked at the quarterly investment report, available in the My USS section?

Yes, it says its invested in the LGIM Climate Tilted Global Developed Markets Equity & Blackrock Aquila Connect Emerging Markets. I'm still not sure how this compares to the FTSE All-World Index (which is what Vanguard's fund aims to track)/

There's masses of information if you go one step further and look at the fund sheets - I don't think you've done that? https://www.blackrock.com/institutions/en-gb/literature/fact-sheet/aquila-connect-emerging-markets-fund-s2-accu-gbp-factsheet-gb00b658gj14-gb-en-dc.pdf and https://fundcentres.lgim.com/en/uk/institutional/fund-centre/PMC/Low-Carbon-Transition-Developed-Markets-Equity-Index-Fund/

Pythagorous

FIREmenow said:

Hiya, I have looked into this myself so some of my previous threads might help.

There are three keys things to know about the DC part of USS:
- as you say, there are no fees, ocfs are subsidised by employers in full (currently). 
- you can only transfer your whole pot out of USS, no partial transfers.
- the main advantage of our hybrid pension is that you may be able to take most, if not all, of your DC pot tax-free when taken combined with the retirement income builder as a Pension Commencement Lump Sum. This is because the 3x auto lump sum is nowhere near the 25% tax-free permitted and you can share that across both parts of the pension.

Based on these, when deciding whether or not transferring your whole DC pot to a SIPP is a good idea, you might want to consider how close retirement is and whether you would have time to fill it up again to make the most of the tax-free Pension Commencement Lump Sum.

If you transfer it out and draw it down from your SIPP, you will have the usual tax-free amount but then be taxed at your marginal rate on the rest. So considering fees, performance, and future tax is worthwhile.

I will be transferring my DC pot out this year, but I am decades away from retirement age and know I can build it back up in time. The SIPP will help bridge early retirement without drawing the USS pension early. I aim to transfer it out a few times until a point where I need to stop and let it grow. As all my contributions are salary sacrifice, it's better to do this than put it in a SIPP directly. 

If you are happy to give more info - age, planned retirement date, current annual pension accrued and lump sum, and value of the DC pot, we can give you a better idea - there are a couple of USS members here and some have taught us all a lot about making the most of USS!

This isn't what you asked, but thinking about it might result in gritting your teeth and staying with USS for the tax-free cash! I think about 8% of members move away from the default investment options, so I doubt there is much motivation to make the DIY investment options very sophisticated or transparent.

Thank you for all the info! Very kind.

My pension value (between USS and the private SIPP) on retirement will be >1.1 mill. Hence I should be able to avail of the full £262K tax free lump sum available (25% of the pension value, capped at  262K). 

My understanding is that the TFLS can be taken from both the USS (the lump sum and any IB DC pot) AND the SIPP. So it's not necessary for me to optimise the USS DC pot (I understand this would be different for someone that doesn't have a large SIPP) in terms of the TFLS, as the amount up to the 262K will come out oof the SIPP side anyway. Unless I'm wrong about this and the TFLS can't come out of the SIPP.

So let's say for arguments sake (keeping things simple) I had a USS pension of 25K pa with a LS of 75K and a USS IB DC pot of say 100k. Assume also a SIPP pot of 600k. Retiring now, the pension value would be 25*20+75+100+600=1.275 mill. Hence the TFLS would be 25%*1.275 mill, but capped at 262K, hence 262k. 175k would come from the USS (75+100) and the remaining 262-175=87k from the SIPP. Is this correct?

Given all the above, I think the main thing for me to consider is whether the zero fees on the USS global equity fund makes it more worthwhile than going for Vanguard's VWRP fund with it's 0.22% fee. I'm guessing it's not really going to make much difference as they are both well diversified global equity funds, but haven't quite got confirmation on this yet. Why are you transferring out from the USS DC IB out of interest?

FIREmenow

Hi, that's more complex than my knowledge and a great problem to have! Pension experts on the board will know more. Yes the tax free total allowance is across all of your pensions, but can only be 25% max of each pot (with all of USS classed as one pot).

My general sense is that I'd rather get the one-shot PCLS, based on an index-linked annual pension and DC pot from my USS pension in the bank, rather than possibly not ending up with enough in the more volatile SIPP to get to the mass tax free. Unless you are planning on taking all your tax-free SIPP cash before you start taking your USS pension (minus the auto lump sum?), if you have a big enough SIPP to do so. I'm not so concerned about the performance of the USS global tracker to forego the tax-free cash for (possible) slightly better returns after fees.

I think there will still be some differences in terms of tax free money that may/may not be relevant that I can think of. Hopefully others can confirm.

When you take the pension lump sum from USS, it is only your annual pension that is crystallised (anything left in the investment builder after tax-free cash is uncrystalised). This is only available at pension commencement so not losing out on any future growth by crystallising. Also if you regretted not taking it later on, or your SIPP investments crashed but you needed to drawdown and 25% became very small, the chance is gone.

-when you take tax free money from the SIPP you're crystallising the other 75%. I guess this could limit future growth if the max tax free allowance increases in the future (you never know). Does this also put limits on whomever might inherit your remaining SIPP if it's already crystallised?

-if you wanted to take the max lump sum allowance of £268,275 from the SIPP, you would need to have 4x that in there for it to be under the 25% cap. You can't carry over unused USS tax-free cash into your SIPP.

-on the flip side if you want to minimise USS PCLS further, if you are are going to be a higher rate tax payer in retirement then taking the pension early and reduced will spread it across more tax years and will have the knock-on effect of also lowering the lump sum. Not sure if there are limits on this.

- if the LTA was brought back in, the DB pension would count towards it, but you would have missed out on the tax-free element, maybe? (That might be way off, purely guesswork on my part!)

For your example: 
The formula for max tax-free cash from the DCpot in USS is
((23*DB/4)-(3*DB))/0.75

((23*25/4)-(3*25))/0.75
= £91,667 tax free so you can't get all £100k out tax free.

Plus the £75k from the auto lump sum. Unless you commute it into more pension, this will always take up some tax-free cash 
= £166,667

The remaining £8.3k left will also have 25% available when it is drawn as it is uncrystalised.
= £2,083

Total so far £168,750

Then the 600k SIPP can usually take a max of £150k (25%) tax free.

BUT due to the cap, you can only get £99,525.

I think the main point to remember based on what you've said is that you need to have 4x your remaining lump sum allowance left in your SIPP to get it all out.

Pythagorous

FIREmenow said:

Hi, that's more complex than my knowledge and a great problem to have! Pension experts on the board will know more. Yes the tax free total allowance is across all of your pensions, but can only be 25% max of each pot (with all of USS classed as one pot).

My general sense is that I'd rather get the one-shot PCLS, based on an index-linked annual pension and DC pot from my USS pension in the bank, rather than possibly not ending up with enough in the more volatile SIPP to get to the mass tax free. Unless you are planning on taking all your tax-free SIPP cash before you start taking your USS pension (minus the auto lump sum?), if you have a big enough SIPP to do so. I'm not so concerned about the performance of the USS global tracker to forego the tax-free cash for (possible) slightly better returns after fees.

I think there will still be some differences in terms of tax free money that may/may not be relevant that I can think of. Hopefully others can confirm.

When you take the pension lump sum from USS, it is only your annual pension that is crystallised (anything left in the investment builder after tax-free cash is uncrystalised). This is only available at pension commencement so not losing out on any future growth by crystallising. Also if you regretted not taking it later on, or your SIPP investments crashed but you needed to drawdown and 25% became very small, the chance is gone.

-when you take tax free money from the SIPP you're crystallising the other 75%. I guess this could limit future growth if the max tax free allowance increases in the future (you never know). Does this also put limits on whomever might inherit your remaining SIPP if it's already crystallised?

-if you wanted to take the max lump sum allowance of £268,275 from the SIPP, you would need to have 4x that in there for it to be under the 25% cap. You can't carry over unused USS tax-free cash into your SIPP.

-on the flip side if you want to minimise USS PCLS further, if you are are going to be a higher rate tax payer in retirement then taking the pension early and reduced will spread it across more tax years and will have the knock-on effect of also lowering the lump sum. Not sure if there are limits on this.

- if the LTA was brought back in, the DB pension would count towards it, but you would have missed out on the tax-free element, maybe? (That might be way off, purely guesswork on my part!)

For your example: 
The formula for max tax-free cash from the DCpot in USS is
((23*DB/4)-(3*DB))/0.75

((23*25/4)-(3*25))/0.75
= £91,667 tax free so you can't get all £100k out tax free.

Plus the £75k from the auto lump sum. Unless you commute it into more pension, this will always take up some tax-free cash 
= £166,667

The remaining £8.3k left will also have 25% available when it is drawn as it is uncrystalised.
= £2,083

Total so far £168,750

Then the 600k SIPP can usually take a max of £150k (25%) tax free.

BUT due to the cap, you can only get £99,525.

I think the main point to remember based on what you've said is that you need to have 4x your remaining lump sum allowance left in your SIPP to get it all out.

Thank you very much for all the additional thoughts here. Will need to set some time aside an digest this fully. You seem to have really thought this all through from every angle! :-)

FIREmenow

Why are you transferring out from the USS DC IB out of interest?

Primarily, I'd like to retire as early as possible, so I want to sever the connection to USS for some of my DC pension so that I can take it from 57 separately, I am making extra contributions and still benefit from salary sacrifice on the way in. You can do one free transfer a year I believe, but I'll do it every few years and then aim to build up the 3.667 times tax-free before I leave. It's a small amount right now, so the annual SIPP platform fees would be about £20 on this first transfer. The global tracker I use in my ISA is only 0.13% fee. 

Also aiming to use the small pots rule with this money.

Things like having more control and choice of investments and not having a time lag on performance info compared to USS are side bonuses, and the USS ethical equity fund I usually invest in contains an actively managed fund and has been lagging it's benchmark with no all-passive option (that is one plus point on the global equity fund you are in). 

USS are making the early retirement factors much worse from 1 October, so having other means to retire early could be handy, as I only have DB pensions.