USS Tax Free Lump Sum and IB

DrWillCUNow

More questions as I begin to finally understand the USS pension landscape, which seems to mostly be a landscape of tar-pits, swamps and burning skips.

Anyhoo....I'm aiming to flexibly retire at 60. I have a DB lump sum of about £65k (from final salary lump sum and Retirement Income Builder lump sum) and an Investment Builder sum of about £10k. Were I to retire fully, then the USS website states:

"If you take both your Retirement Income Builder benefits and Investment Builder savings together then, depending on the size of your pot, you may be able to take all of your Investment Builder pot as part of your tax-free cash lump sum when you retire." (my italics). - The bit about the 'size of my pot' opens a whole can of worms for me.

My understanding is that should I not draw the IB then, 25% would be tax free and the remainder taxable at the normal income tax rate.

Now if I were to retire flexibly at 80% pension, I would get 3x my pension as lump sum from the DB, but I can't find out what happens to the IB sum. Do I take it then, later when I fully retire along with the remaining lump sum, and if I do take it when I fully retire would it still be tax free?

It's probably lurking within the T&C but I can't find it.

Marcon

DrWillCUNow said:

More questions as I begin to finally understand the USS pension landscape, which seems to mostly be a landscape of tar-pits, swamps and burning skips.

Anyhoo....I'm aiming to flexibly retire at 60. I have a DB lump sum of about £65k (from final salary lump sum and Retirement Income Builder lump sum) and an Investment Builder sum of about £10k. Were I to retire fully, then the USS website states:

"If you take both your Retirement Income Builder benefits and Investment Builder savings together then, depending on the size of your pot, you may be able to take all of your Investment Builder pot as part of your tax-free cash lump sum when you retire." (my italics). - The bit about the 'size of my pot' opens a whole can of worms for me.

Your first sentence displays an admirable grasp of the reality!

There are two limits which need to be taken into consideration, neither of which appears likely to impact on you given the figures in your thread (but also depends on any pension provision you might have built up elsewhere).

The maximum tax free cash you can take from a DB scheme is set out in the rules of the scheme, subject to an overall limit set by HMRC. You may be able to take the whole of your IB savings as part of your tax free cash lump sum, meaning you can keep more of the DB section as regular pension payments.

The Lifetime Allowance has been replaced by the Lump Sum Allowance, meaning that the tax free cash you can take from all your pension arrangements is £268,275.

MarlowMallard

Agree it is confusing, but it's not a "burning skip"...  USS is not as good as the government NHS/teachers' schemes, but is considerably better than most schemes in the private sector. 

Re your question, if you take your standard option of pension + 3x lump sum from the defined-benefit part,  that is hypothetically "valued" by HMRC as a "pot" of 23x the pension:  20 for the annual and 3 for the lump. You can take up to 1/4 of that "pot value" tax-free, so that's up to 5.75x pension, so you can take an additional 2.75x pension out of Investment  Builder tax-free, if you have that much - yours looks like well under, so you can take the whole Inv Builder tax-free. 

There are various other options e.g. trading less pension for more lump sum, roughly £1k less pension buys £18k more lump sum at age 60ish.  

In my case I left the Inv Builder untouched, traded lower pension for max lump sum from final-salary, and I got a pension about 15% less than the standard,  and lump sum about 5.65x the standard pension (actually it's 6.66x the reduced pension, because 6.666 is 1/4 of 26.666  ) . 
This means I pay a bit more tax on the Inv Builder in the next few years, but can get more cash out before age 70 .   HTH 

Barralad77

In perhaps simpler terms, the amount of money you can take tax-free is 6.667 x annuity. So if the total (of 3 x annuity lump sum plus whatever is in the IB) is less than 6.667 x annuity then you can take everything tax-free. For example:
Annuity is £10,000
IB is worth £30,000

Max tax-free = 6.667 x 10,000 = £66,670 [A]
(3 x annuity) + (IB) = £60,000 [B]

Take all £60,000 tax-free.

If [B] is more than £66,670 then either leave some in the IB or exchange some 3 x annuity for extra pension. Other options are available (as per previous post).

Universidad

MarlowMallard said:

Agree it is confusing, but it's not a "burning skip"...  USS is not as good as the government NHS/teachers' schemes, but is considerably better than most schemes in the private sector. 

That would be completely true if the salaries we like for like between the University sector and the rest of the private sector. However, once you adjust the salaries to account for nearly two decades of wage supression, it doesn't look so good. And that's before you consider the extra hours most University staff expect to work. 

20% contributions on half the salary doesn't look market leading any more!

LittleMax

MarlowMallard said:

Re your question, if you take your standard option of pension + 3x lump sum from the defined-benefit part,  that is hypothetically "valued" by HMRC as a "pot" of 23x the pension:  20 for the annual and 3 for the lump. You can take up to 1/4 of that "pot value" tax-free, so that's up to 5.75x pension, so you can take an additional 2.75x pension out of Investment  Builder tax-free, if you have that much - yours looks like well under, so you can take the whole Inv Builder tax-free. 

Thank you so much for this explanation - I was in a USS webinar yesterday "Approaching Retirement" and the 2 so called expert advisors running it made a complete hash of explaining this properly.  2 minutes on here and eureka - I understand where their figures came from in their worked example.  

uss_hamish

I was in that USS seminar too. When it turned out the presenters didn't know about the upcoming change to commutation factors, I did wonder why I was wasting my time, or whether I should be giving the seminar myself...

uss_hamish

Don't forget, by the way, that in addition to taking 1/4 of the HMRC value of the Retirement Income Builder (that's the 23 x annual amount) tax free, you can also take 1/4 of the Investment Builder amount tax free. I haven't checked the various factors people quote above to see whether they take this into account.

Barralad77

uss_hamish said:

I was in that USS seminar too. When it turned out the presenters didn't know about the upcoming change to commutation factors, I did wonder why I was wasting my time, or whether I should be giving the seminar myself...

More changes? USS have history, here. Can you please point me towards these changes? 

Edit: Found them. Thanks for the alert, though.

MarlowMallard

uss_hamish said:

Don't forget, by the way, that in addition to taking 1/4 of the HMRC value of the Retirement Income Builder (that's the 23 x annual amount) tax free, you can also take 1/4 of the Investment Builder amount tax free. I haven't checked the various factors people quote above to see whether they take this into account.

Yes I think this is correct, so it's a bit more than I said above. I think if you take annual pension P plus the standard 3P lump, and take extra lump B out of the Investment Builder, the limit on the tax-free lump becomes 
 3P + B <= 0.25*( 23P + B )  
 which you can simplify to 0.75 B <= 2.75 P , so B <= 3.66 P.  So the total lump is a max of 6.66 P. 

In my case I did it differently, I took nothing from Inv Builder, took reduced pension and max lump of 6.66* reduced pension.  That way I'll pay a bit more tax on the Inv Builder, but I can get more cash out before age 67 because I project I'll be running a surplus anyway after state pension turns on. ) 

BoomerGalxza

I'm pretty new to all of this, and learning a huge amount from the really informative posts on here. I wonder if someone could explain whether this expression 0.25*(23P + only applies for the 'my projected benefits' values (on the first screen of the modeller) or if it applies for any P and B (with commutation/ reverse commutation). I'm trying to maximise my TFLS, also significantly overpaying into IB, and the 0.25*(notional LTA) expression seems to vary quite a bit depending on options chosen. E.g. if I 'take all' option in the modeller I seem to end up with a TFLS larger than the adjusted 0.25*(23P + limit when I plug the numbers in. Any insight would be much appreciated, many thanks.