USS Maximum Lump Sum Reduced by Second Pension?

RSTime

I am a deferred USS member (for 10 years). I received a provisional benefits payable statement in May and I subsequently completed the paperwork requesting my pension to start on the 30th September with the maximum lump sum.

I received the confirmation of my retirement benefits a couple of weeks ago. To my surprise, the benefits were different to the estimate I received in May. The pension is ~£1,500 more per annum and lump sum ~£26,517 less.

I asked USS why there was a discrepancy and their response was "After reviewing your documents, I can confirm that the settlement letter you received on 06 August 2024 contain the correct figures following confirmation on your option forms that you have previous Lifetime Allowance usage of 18.17%. Taking this into consideration at the time of settling your benefits, a reduced maximum tax-free sum was allowed compared the quote which assumed no previous usage."

I started a smaller TPS pension just over a year ago, equivalent to a LTA of 18.17% (with no lump sum). Is the USS correct in reducing my lump sum given that I have not taken a lump sum from my TPS pension? Irrespective, my understanding is that the LTA was effectively abolished (unless the lump sum exceeds £268,275, which it certainly does not in my case) thus I do not understand the explanation provided by the USS, surely the pensions are independent?

Can anyone explain the USS rationale for reducing my maximum tax-free sum?

JoeCrystal

Please supply the relevant information as to how much your stated pension and lump sum supplied are. A change in amount makes no sense at all with nothing in context. Does your research yield anything?

It would be best to look into how Individual Lump Sum Allowance works. My quick googling suggests that your Individual Lump Sum Allowance will be reduced accordingly since you already used 18.17% of LTA before this tax year. So basically, use 25% of that 18.17% LTA to reduce your Lump Sum Allowance, and they will reduce the lump sum available to you accordingly.

* £1,073,100 x 18.17% = £194,982.27
* £194,982.27 x 25% = £48,745.57
* £268,275 - £48,745.57 = £219,529.43

For a person who used 100% of their LTA before this tax year, for example, no Individual Lump Sum Allowance is left. But I may be wrong on that anyway.

For anyone who wants to check the legislation, check Part 6 on PDF page 244 on this link: https://publications.parliament.uk/pa/bills/cbill/58-04/0014/230014.pdf 

It does detail the availability of an individual's lump sum allowance and how to calculate it. This is in effect for the year 2024-25 and subsequent tax years. 

Here is pensions-tax-manual as well: https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm174300

Now , interesting enough: it did mention that Paragraph 127 Schedule 9 Finance Act 2024 say the following:

If an individual holds complete and accurate records for all the tax-free benefits they received prior to 6 April 2024, and can show that less than 25% of the benefits they took before that date were taken as tax-free lump sums, they may choose to apply for a transitional tax-free amount certificate from their pension scheme confirming their lump sum transitional tax-free amount and their lump sum and death benefit transitional tax-free amount.  

It may be worth applying for a transitional tax-free amount certificate from the TPS maybe and mentioning it to USS? That might allow USS to increase the limit instead.

This has been a fascinating rabbit hole to look into! Again, I have no experience or knowledge relating to this at all, so I may get the wrong end of the stick as well.

RSTime

So what you are effectively saying is that my lump sum allowance is reduced even though I did not take a lump sum from my TPS pension. I did not (annoyingly) appreciate that this would be the case given the abolition of the LTA, particularly as my lump sum is nowhere near the £268,275 maximum allowed. But your calculation is correct in that they have capped the lump sum to £219,529.43

Just as further background, I started my TPS pension 6th April 2023. Also, the LTA Value for the USS pension has not changed much between the provisional benefits payable statement in May and the confirmation of my retirement benefits I received in August, USS have simply reduced the tax-free lump sum (as per your calculation) and increased the pension.

I will contact USS to see if I can go down the route of a transitional tax-free amount certificate .

JoeCrystal

USS would not be aware of the fact that you did not take any tax free lump sum from TPS btw which is why I mentioned about asking from the TPS as well.

With no further information, I think it is natural for USS to assume that you did take full tax free lump sum. Most people do and indeed in case of old pension schemes, not given a choice in not taking it.

RSTime

Thanks for your clear explanation, greatly appreciated.

I have just asked the TPS for a transitional tax-free amount certificate and also updated USS and asked the question...

RSTime

I should add, the reason I want to minimise my pension and maximise the lump sum is that I am close to the higher rate tax (40%) limit with my two pensions and exceed the limit with part-time work and will exceed when my state pension starts. I assume that this strategy (maximise lump sum) would be standard advice?

RSTime

@JoeCrystal thanks so much for your advice. I applied for and received a transitional tax-free amount certificate and will be eligible for the maximum tax-free lump sum from the USS. Am just waiting for the letter confirming settlement details. I just hope they have calculated it right this time.

I should add that dealing with the USS has been far from smooth. The person I was initially communicating with left the USS and despite me copying the Deferred Retirement team nobody at USS picked up my request until I called some 3 weeks later. This follows the other issue I had with a miscalculated settlement statement earlier in the year. A tad concerning.