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!