Worth transferring from USS Investment Builder to SIPP?

Pythagorous

FIREmenow said:

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.

Interesting, thanks for sharing.

This makes sense and was what I was initially considering. However with a possible market correction coming I like the idea of being able to keep as much equity investment as long as possible (which taking the early ret on the DB would help with).

I forgot the ERFs were changing in October though (and who knows what they are like in 10 years time or so) so I may rethink this. 

I'm not familiar with the small pots rule? 

Also, out of interest, what global tracker has 0.13% fees? I thought VWRP with 0.22% was the ETF fund of choice for most people due to the very low fees, so surprised to hear there's one out there at 0.13% (unless this is an amalgamation that mimics VWRP?).

Pythagorous

Trying to digest some of this...

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).

I'm trying to get my head around the practical implications of this. Can you provide an example when this becomes an issue? Is it to do with when you crystalise the two separate pots and hence access to the tax free cash? Or can it have implications for the actual overall amount of tax free cash you can get (I'm assuming not, as presumably the amount of tax free cash from both pensions will always amount to the same)?

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.

I'm presuming this is only an issue if your overall pension is potentially below the 4 times the tax free limit amount? If so then it seems to make sense to make sure you are not tying the pension value to the (potentially) volatile SIPP which could be in a market crash at the time of crystallisation. Have I understood you correctly?

Can I also check how the tax free cash calculation works in practice. My very basic understanding (which could be completely wrong!) is that when you crystalise each different pension (which can happen at different times) the value gets calculated and the 25% tax free cash then gets calculated for that particular pension.

So for example, using my previous (factitious) numbers, as SIPP of 600k crystalised at age 57 would mean 25% (150K) of this is earmarked for drawdown as being tax free. If the USS 25k DB pension was taken/crystalised at age 65, the value of this would be calculated (alongside the AVC pot), from which the max tax free cash would be calculated using the USS formula you highlighted: ((23*DB/4)-(3*DB))/0.75=((23*25/4)-(3*25))/0.75= £91,667. £75K of this would come from the DB lump sum and the other £16,667 could come from the DC AVC pot (without crystalising the remaining part of the DC AVC pot).

 The rest of the DC AVC pot could be crystalised at a later date. Let's say at age 70 it is still worth 100k. The 25% tax free amount is simple in this case, £25K. However the 262k limit kicks in here, so the amount of tax free cash from this final pension crystallisation is ~262k-150k-92k=20K.

Have I understood this correctly?

FIREmenow

I'm not familiar with the small pots rule?

Also, out of interest, what global tracker has 0.13% fees? I thought VWRP with 0.22% was the ETF fund of choice for most people due to the very low fees, so surprised to hear there's one out there at 0.13% (unless this is an amalgamation that mimics VWRP?).

This pdf from Scottish Widows sums up the small pots rule. Handy for you regarding Lump Sum Allowance. For me the key benefit is not triggering MPAA to keep my options open.  HL currently offer the ability to split 3x small pots out of a larger SIPP to make this easier.

For global trackers, 
ETF 0.15% Invesco Markets Ii PLC IVZ FTSE WLD UCITS ETF ACC (FWRG) is just over a year old but growing pretty well 

Or index fund 0.13% HSBC FTSE All-World Index C Acc

There are some other options reviewed on Monevator global tracker page

The HSBC one is offered by Dodl so ideal for my small transfer.

FIREmenow

Will try and work through your second post, but I'm not an expert! 

I'm trying to get my head around the practical implications of this. Can you provide an example when this becomes an issue?

So, there was an example of this in the fictitious calculation, because although there was £100k in the DC pot, only ~£91k could be accessed tax-free as the 25% limit had been reached. You can't borrow or carry over any tax-free allowance from the SIPP, it is just calculated within the 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.

I'm presuming this is only an issue if your overall pension is potentially below the 4 times the tax free limit amount? If so then it seems to make sense to make sure you are not tying the pension value to the (potentially) volatile SIPP which could be in a market crash at the time of crystallisation. Have I understood you correctly?

I think we are on the same wavelength here. The 20x value that is put on a defined benefit pension for the 25% tax-free calculation is very generous so with long service could easily use the majority of the Lump Sum Allowance. But if you are going to use a lot of the SIPP before you start taking the DB, you will know how much allowance you have left.

It's worth noting that being able to combine the two parts of USS for the tax-free calculation is not a universal thing. For example, I think LGPS is the only public sector DB that allows this combining of pots (just in case you have other DB pots!)

So for example, using my previous (factitious) numbers, as SIPP of 600k crystalised at age 57 the whole pot would only be crystallised in one go like this if you wanted to take all of the tax-free cash in one go, which you don't have to would mean 25% (150K) of this is earmarked for drawdown as being tax free. If the USS 25k DB pension was taken/crystalised at age 65, the value of this would be calculated (alongside the AVC pot), from which the max tax free cash would be calculated using the USS formula you highlighted: ((23*DB/4)-(3*DB))/0.75=((23*25/4)-(3*25))/0.75= £91,667. £75K of this would come from the DB lump sum and the other £16,667 could come from the DC AVC pot No, this is in addition to the auto lump sum, so £166,667 in total which wouldn't be possible if you'd already had £150k from the SIPP, so you could look at other options when taking USS to give you the best deal. Commuting lump sum pension might work but I haven't tested the maths. You can only commute the auto lump sum, not the DC pot.

 The rest of the DC AVC pot could be crystalised at a later date. Let's say at age 70 it is still worth 100k. The 25% tax free amount is simple in this case, £25K. However the 262k limit kicks in here, so the amount of tax free cash from this final pension crystallisation is ~262k-150k-92k=20K.
As above, you've got no allowance left at this point. It's worth reading up on how you can access what's left in the DC pot after commencing retirement as the options are limited.

See comments in bold above on your example.

In terms of crystallising the SIPP, the exact process and methods permitted will vary by provider, but to withdraw eg. £20k at age 57, you could take this as: 

UFPLS, where £5k is tax free and 75% is taxable at your marginal rate, leaving everything left in your SIPP uncrystalised. 

Or you could take all £20k as tax-free cash, meaning £60k of your remaining pot will be split off and marked as crystallised. Even if that £60k continues to grow inside the SIPP, you could never get any more tax-free cash from it. In the £600k example you would have £60k crystallised and £520k uncrystalised, and £20k in the bank. If you had no other earnings that tax year then only the portion of the taxable £15k above the personal allowance would be taxed.

The advice for someone with pensions around £1m is to pay for some independent financial advice - they will gather all the facts and details and look at balancing many things including tax-free and taxable withdrawals, as well inheritance planning if relevant. Your age and how much per year you want to live on in retirement will also play a big part.

Pythagorous

FIREmenow said:

Will try and work through your second post, but I'm not an expert! 

I'm trying to get my head around the practical implications of this. Can you provide an example when this becomes an issue?

So, there was an example of this in the fictitious calculation, because although there was £100k in the DC pot, only ~£91k could be accessed tax-free as the 25% limit had been reached. You can't borrow or carry over any tax-free allowance from the SIPP, it is just calculated within the 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.

I'm presuming this is only an issue if your overall pension is potentially below the 4 times the tax free limit amount? If so then it seems to make sense to make sure you are not tying the pension value to the (potentially) volatile SIPP which could be in a market crash at the time of crystallisation. Have I understood you correctly?

I think we are on the same wavelength here. The 20x value that is put on a defined benefit pension for the 25% tax-free calculation is very generous so with long service could easily use the majority of the Lump Sum Allowance. But if you are going to use a lot of the SIPP before you start taking the DB, you will know how much allowance you have left.

It's worth noting that being able to combine the two parts of USS for the tax-free calculation is not a universal thing. For example, I think LGPS is the only public sector DB that allows this combining of pots (just in case you have other DB pots!)

So for example, using my previous (factitious) numbers, as SIPP of 600k crystalised at age 57 the whole pot would only be crystallised in one go like this if you wanted to take all of the tax-free cash in one go, which you don't have to would mean 25% (150K) of this is earmarked for drawdown as being tax free. If the USS 25k DB pension was taken/crystalised at age 65, the value of this would be calculated (alongside the AVC pot), from which the max tax free cash would be calculated using the USS formula you highlighted: ((23*DB/4)-(3*DB))/0.75=((23*25/4)-(3*25))/0.75= £91,667. £75K of this would come from the DB lump sum and the other £16,667 could come from the DC AVC pot No, this is in addition to the auto lump sum, so £166,667 in total which wouldn't be possible if you'd already had £150k from the SIPP, so you could look at other options when taking USS to give you the best deal. Commuting lump sum pension might work but I haven't tested the maths. You can only commute the auto lump sum, not the DC pot.

 The rest of the DC AVC pot could be crystalised at a later date. Let's say at age 70 it is still worth 100k. The 25% tax free amount is simple in this case, £25K. However the 262k limit kicks in here, so the amount of tax free cash from this final pension crystallisation is ~262k-150k-92k=20K.
As above, you've got no allowance left at this point. It's worth reading up on how you can access what's left in the DC pot after commencing retirement as the options are limited.

See comments in bold above on your example.

In terms of crystallising the SIPP, the exact process and methods permitted will vary by provider, but to withdraw eg. £20k at age 57, you could take this as: 

UFPLS, where £5k is tax free and 75% is taxable at your marginal rate, leaving everything left in your SIPP uncrystalised. 

Or you could take all £20k as tax-free cash, meaning £60k of your remaining pot will be split off and marked as crystallised. Even if that £60k continues to grow inside the SIPP, you could never get any more tax-free cash from it. In the £600k example you would have £60k crystallised and £520k uncrystalised, and £20k in the bank. If you had no other earnings that tax year then only the portion of the taxable £15k above the personal allowance would be taxed.

The advice for someone with pensions around £1m is to pay for some independent financial advice - they will gather all the facts and details and look at balancing many things including tax-free and taxable withdrawals, as well inheritance planning if relevant. Your age and how much per year you want to live on in retirement will also play a big part.

Thank you very much for this. Think I've sort of got my head around it now.

Yes, definitely plan on using an IFA later on. Unfortunately those I've consulted on already only want to engage if i will let them manage my investments (don't see the value here and statistics prove it).

Pythagorous

@FIREmenow, just in case this helps your situation. I decided not to transfer out from the USS IB (for now anyway). The main reason is because I just found out that you can reverse commute old Prudential MPAVCs that were transferred in from the old USS AVC fund into additional pension. It gives quite good value, looking at the reverse commutation factors (https://www.uss.co.uk/for-members/calculate-your-benefits/factors-used-by-uss), so I'm keen to do keep this option open.

I guess a downside is that a reverse commutation could mean losing out on the tax free element, which is available with the cash. However, as I'm likely going to be already maxed at the 268k limit even after this reverse commutation, the tax free benefit being lost probably won't even apply in my situation.

FIREmenow

@Pythagorous thanks, I don't have Pru AVCs but getting all this info should help your decision making.

Sounds like there are a lot of factors and options at play for you - getting some advice might still be worth it now. 

The Guide for IFAs on the USS website is also good for a succinct summary of what is possible.

LL_USS

@Pythagorous, could you kindly help me with the following two questions - thank you very much.

Question 1:
If (1) I only have an average pension (targeting 20 years more to work),
(2) whilst I am not very good at checking what investments options are out there (so I choose "Invest all" and "Manage for me" on my USS account)
(3) and feel my volunteer contribution over the last 7 years (since I started the IB pot) seems okay in returns (putting in 34.5 returning 5.5 to make about 40K pot at 31 mar 2024)

do you think it's okay to just keep doing VC like this, rather than trying S&S ISAs, which I am not familiar with? My head already hurts after calculating the implication of the recent the uplift of pay (so I know when and how much to increase VC percentage).

Question 2:
I am currently put in VC of about 1K a month just enough to be tax efficient (At this rate I will have the pot of over the 3.67*projected DB amount to benefit from TFLS at retirement). The rest of my surplus is currently building up some cash ISAs and LISAs just so I have some variety and flexibility, whilst the saving rates are still okay. I don't know what to do yet when saving rates become very low again - perhaps I should max on VC then? (last USS pension statement I used a bit less than half of the 60K Annual Allowance).

Micrographia

LL_USS said:

@Pythagorous, could you kindly help me with the following two questions - thank you very much.

Question 1:
If (1) I only have an average pension (targeting 20 years more to work),
(2) whilst I am not very good at checking what investments options are out there (so I choose "Invest all" and "Manage for me" on my USS account)
(3) and feel my volunteer contribution over the last 7 years (since I started the IB pot) seems okay in returns (putting in 34.5 returning 5.5 to make about 40K pot at 31 mar 2024)

do you think it's okay to just keep doing VC like this, rather than trying S&S ISAs, which I am not familiar with? My head already hurts after calculating the implication of the recent the uplift of pay (so I know when and how much to increase VC percentage).

Question 2:
I am currently put in VC of about 1K a month just enough to be tax efficient (At this rate I will have the pot of over the 3.67*projected DB amount to benefit from TFLS at retirement). The rest of my surplus is currently building up some cash ISAs and LISAs just so I have some variety and flexibility, whilst the saving rates are still okay. I don't know what to do yet when saving rates become very low again - perhaps I should max on VC then? (last USS pension statement I used a bit less than half of the 60K Annual Allowance).

From the way you framed your questions I'm guessing your AVCs receive higher rate tax relief and you probably make them via salary sacrifice. Apologies if you already know this, but your AVCs get tax relief on their way in and then you get taxed when you draw income from your pension, whereas ISA contributions are made from income that has already been taxed and anything you withdraw from an ISA is tax free. 

Outperforming that >40% head start in your investments by making ISA contributions instead would be hard. As a USS member as well, I found the main benefit to ISA investments was that they were easily accessible if needed when my family were younger. Once my S&S ISA reached a decent size and I became a higher rate tax payer, making AVCs instead was an easy choice.

It can be complicated though. So much depends on what your personal circumstances are and what your aims are for your pension and retirement. Have you used the USS modeller to get an idea of what your retirement benefits might look like and played with the different options available to you? 

Having said that, if you have 20 years of work to go, are contributing a grand a month in AVCs to an IB pot that already stands at 40k, on top of your USS RIB pension (and with the State Pension as well?), I think you will be in a very good position whatever you decide to do :-D !