Taking USS benefits

Nick_Dr1

As a member of USS I've been playing with the benefit modeller.

I have both the DB part and the DC part.

Everything seems very sensible except that with the option to take all benefits, it appears to give me all of my DC part as tax free lump sum. I always thought that only 25% of this was tax free. The other options don't do this.

For the purposes of illustration, the DB part offers me a lump sum of about £60k and the DC part is about £40k.

If this is the case, it would seem very sensible to take the maximum tax free lump sum rather than draw down the DC bit slowly, given straightforward circumstances. I could always reinvest the extracted DC pension into ISA and still have growth but with no tax on the way out either.

Does the USS have special rules for extracting lump sums in one go or have I misunderstood?

Barralad77

Hi Nick,
You can take 25% of the total value of your pension. It’s more complicated than a pure DC pension, but as far as my knowledge goes it amounts to 25% of your Lifetime Allowance figure. Your LTA is stated on your annual statement. If your 3 x Lump Sum plus your IB balance add up to less than 25% of your LTA then all can be taken tax free. A simpler way of working it out, though, is to multiply your annuity by 6.667. If your annuity is £20k per year then you can take (20,000 x 6.667) tax free, which comes to around £133,000. In your case, the numbers add up to £100,000 so you’re good to go, so to speak. But also check that’s what you want to do; I’m inferring that you’ve selected to max out the tax-free amount by using reverse commutation which is the default if choosing Option 2 in the USS illustrator.

Barralad77

Was in a hurry, earlier, so here’s a fuller version.

Use the following (hypothetical/rounded) numbers:
Annuity = £20,000
3 x LS = £60,000
Investment Builder pot = £140,000

LTA = (20*20,000) + 60,000 + 140,000 =600,000
Note that value of LS + IB = £200,000

With no reverse commutation, take 6.667*20,000 = £133,000 as tax-free cash.

That leaves £67,000 in the IB.

Take 25% of the remaining IB pot also tax-free (67,000*.25) = £17,000

Net outcome is that you would have taken a total of £150,000 (133,000 + 17,000) tax-free, which is 25% of the LTA figure of £600,000.

Hopefully someone will come in and either confirm I’m right or point out if I’m wrong (as that will help me plan my own exit….).

glennevis

Nick_Dr1 said:

As a member of USS I've been playing with the benefit modeller.

I have both the DB part and the DC part.

Everything seems very sensible except that with the option to take all benefits, it appears to give me all of my DC part as tax free lump sum. I always thought that only 25% of this was tax free. The other options don't do this.

For the purposes of illustration, the DB part offers me a lump sum of about £60k and the DC part is about £40k.

If this is the case, it would seem very sensible to take the maximum tax free lump sum rather than draw down the DC bit slowly, given straightforward circumstances. I could always reinvest the extracted DC pension into ISA and still have growth but with no tax on the way out either.

Does the USS have special rules for extracting lump sums in one go or have I misunderstood?

My understanding as a recently retired USS member (not a financial expert) is yes, there is a one off special circumstance when you draw your DB pension when you have an IB pot.

I was advised by USS staff that as my IB pot was less than 25% of my "total pot" (LTA figure) then I could take the whole of my IB pot as TFLS. The standard letter I received 3 months before retirement did not give this 4th option since it doesn't apply to everyone. I only discovered this option when I rang up with a query about how to fill in the form stating my choice. My aim was to maximise my TFLS.

As a consequence my annual DB pension is higher than I expected.

Barralad77

If your pension was higher than expected then it sounds as though you purchased some extra annuity with your 3 x LS money. This has the effect of increasing the chances of taking all the IB pot tax free. For example, if you use some of the 3 x TFLS to buy an extra £2,000 of annuity (the IB money can’t be used to buy extra annuity, I don’t believe) then the total amount you can take tax free increases by £13,334 (I.e., £2000 x 6.667). There is still the option to maximise the tax free sum taken at the point of retirement without any reverse commutation, though (e.g., if your TFLS and IB add up to more than 6.667*annuity). The Benefit Illustrator allows you to play around with these numbers to see what suits best (e.g., buy more pension vs leave more in the IB).

Nick_Dr1

This all appears to be spot on, so thank you for your explanation.

It appears (having played a bit more and put in a sensible expected retirement age) that I will be finely balanced with respect to the LTA that applies to the scheme in terms of default. ie 25% of my LTA is very close to the standard DB scheme default + all my DC money, assuming sensible investment gains etc.

There are plenty of options to play with, but I'm still seeing that taking all the benefits in one go looks sensible as this allows me to invest tax free money in eg SS ISAs and still take tax free income from them.

I am assuming that any further DC schemes eg if there was any money left in the USS DC scheme, or there were other DC schemes outside of USS, would allow 25% withdrawal tax free up to the £268k lifetime limit on tax free withdrawal.

I'm just musing at the moment and don't really have a specific plan - just trying to get a handle on all the rules and options that might be in play!