USS Tax Free Lump Sum and IB

BoomerGalxza

Sorry for the mix up in the post - the shades should be a 'B'!

MarlowMallard

BoomerGalxza said:

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.

I think the 0.25 * ( 23P + B ) only applies if you take the standard 3x lump from Retirement Income Builder, plus extra cash B from Inv Bldr.   If you commute pension for TFC, the limit on lump is basically 6.66x the adjusted pension.  In that option, any Inv Bldr above B is left uncrystallised,  and you can take UFPLS out of that in future with 25% tax-free and 75% taxed as income.  

However, if you do "take all", I think it will chuck in *all* of your Inv Bldr into the pot, call that T,  give you a lump of approx 0.25*( 23P + T ) (see note), and use anything left over in Inv Bldr to buy extra pension, so you get more now BUT the Inv Bldr is all gone.   (Note- this won't be exact because the USS commutation ratio is not quite 20, so if you commute some pension to lump at 18:1 your imaginary "pot" gets slightly smaller, but not much).   

As above, what I did was take nothing from Inv Bldr, commuted pension for lump of 6.66x reduced pension (about 5.75x standard pension), and I'll take out most of Inv Bldr in annual chunks before 67 so it's only taxed at effective 15%.  (i.e. 25% will be tax-free, the rest taxed at 20%, as long as I spread it out enough to not quite tip into 40% income tax).  This way, I will pay a bit more tax but I maximise cash-in before age 67. 

Barralad77

If you choose the take all option in the modeller, and you have some money in the IB, the modeller will convert (via RC) some of your 3x LS into annuity to maximise the amount you can take tax free. This is because the maximum you can take tax free is 6.667 x the annuity, and your standard lump sum is only 3x the annuity. Hence the bigger the annuity, the more you can take tax free. This also makes it easy to work out how much you can take tax free without any reverse commutation as it’s simply the starting figure (the standard annuity rate) multiplied by 6.667.

For example, we can use the following numbers:
DB annuity - £20,000
3 x annuity LS - £60,000
IB value - £50,000

Max tax free you can possibly take = 6.667 x annuity = £133,340

This is more than the LS + IB above (£110,000) so you can take all £110,000 as tax free cash.

If, however, your 3 x LS + IB are, together, worth more than 6.667 x annuity the modeller automatically ‘buys’ extra annuity with some of the LS money in order that you can take more tax free.

In short, you can maximise the amount you take tax free either with RC (which is what the default setting in the modeller does) or without.

Another way of working out whether you can take all of your IB as tax free cash is to simply multiply your standard annuity figure by 3.667. If the answer is more than you have in the IB then you will know you can take all of the IB pot tax free (in addition to the 3 x annuity TFLS).

Apologies if this isn’t what you’re asking about. I’ve spent so long typing this I’ve forgotten what the question was😂

MarlowMallard

Another way of working out whether you can take all of your IB as tax free cash is to simply multiply your standard annuity figure by 3.667. If the answer is more than you have in the IB then you will know you can take all of the IB pot tax free (in addition to the 3 x annuity TFLS).

Apologies if this isn’t what you’re asking about. I’ve spent so long typing this I’ve forgotten what the question was😂

I agree with the above.
 It appears that BoomerGalxza probably has more in the IB than 3.667 P,  hence doing "Take All" will give him more TFC and pension but nothing left in the IB.  I'd suggest he takes 3.666*P out of IB now,  then take the rest of IB as UFPLS later on, if he can do this and avoid tipping into 40% income tax. 

BoomerGalxza

Thank you both for explaining - that's making much more sense to me now. I'm still a bit confused about the 6.67*DB vs the 0.25*(23*DB + DC) (I'll call this 0.25*(notional LTA)) though (changing letters to avoid more sunglasses!). If I wanted to, could I extract tax free cash from the remaining DC, up to the 0.25*(notional LTA) value?

For example, rounded figs below (numbers for age 60 when I'm aiming to retire/ also IB extra contributions mitigation in case I'm encouraged to go sooner with everything that's currently going on!...)
Standard values on first screen of modeller: DB = £26.3k, 3*DB = £78.9k, DC = £271k. Using these gives max TFLS approx £219k, using formula above 0.25*(notional LTA), i.e. bigger than the 6.67*DB (= £175k)
'Take all' default: DB = £30k, TFLS = £200k, DC remaining = £68k. Adding on the extra 25% from the remaining DC (which modeller suggests is still possible), 0.25*68+200 = £217k (close to max TFLS calc with standard values) 
Min DB option: DB = £22.5k, TFLS = £150k, DC = £271k. 0.25*271+150 = £218k (close to max TFLS calc with standard values) 
(As well as small rounding errors I have an old £1k Pru avc that might mean figs don't match exactly).

Sorry for all the detail, but thought it might help to illustrate things with some numbers. Am I correct in thinking I could, in principle, access max TFLS for each option in the way described, or should I be focusing on the 6.67*DB? 

Barralad77

It’s 6.667 x annuity in all of the above. £200,000 is 6.667 x £30,000. £150,000 is 6.667 x £22.500. £175,000 is 6.667 x £26,300.

Yes, you still get 25% of whatever is left over in the IB tax free (e.g., £17,000 if it’s £68,000 left in).

If I’m honest, I’m not sure what you’re asking? 

6.667 x annuity is what you can take out tax free in one go, when you take the annuity. You take 25% of whatever’s left in the IB tax free later on.

You need to calculate how much the extra annuity costs. Without RC and leaving everything in the IB you would have an annuity of £26,300 and get approx £309,000 in cash after tax (net rate of 15% on the £271,000 IB). With RC you would get an annuity of £30,000 and approx £258,000 in cash (having paid 15% tax on the £68,000). In other words, the extra £3,700 in annuity costs around £51,000 in cash.

Only you will know which will be better for you: The extra annuity or the extra cash.

Edit. Forgot to mention the sweet spot. Maximising the tax free element without RC. That gives you an annuity of £26,300 and approx. £323,000 in cash (paying 15% tax on the £175,000 left in the IB after taking £175,000 out tax free at the point of retirement. From various threads on here, this looks to be the most popular option by some distance). This is based on the fact that you have a total of around £350,00 split between the 3 x annuity TFLS and the IB.

BoomerGalxza

Thank you so much Barralad for taking the time to explain that so clearly, really appreciate it and that all makes sense to me now

Barralad77

BoomerGalxza said:

Thank you so much Barralad for taking the time to explain that so clearly, really appreciate it and that all makes sense to me now

No worries. To complete the picture - you might have run the calculations already - you could have an annuity of £22,500 and approx £380,000 in cash. One suggestion is to create a table with 3 columns, using the calcs above (after checking my maths is correct!) Column 1 - Options (1-2-3-4). Column 2 - Annuity figures. Column 3 - corresponding net cash figures. I’ve found that helps me to see which, if any, stands out as being the most attractive proposition. Good luck, regardless.

MarlowMallard

BoomerGalxza said:

Standard values on first screen of modeller: DB = £26.3k, 3*DB = £78.9k, DC = £271k. Using these gives max TFLS approx £219k, using formula above 0.25*(notional LTA), i.e. bigger than the 6.67*DB (= £175k)
'Take all' default: DB = £30k, TFLS = £200k, DC remaining = £68k. Adding on the extra 25% from the remaining DC (which modeller suggests is still possible), 0.25*68+200 = £217k (close to max TFLS calc with standard values) 
Min DB option: DB = £22.5k, TFLS = £150k, DC = £271k. 0.25*271+150 = £218k (close to max TFLS calc with standard values) 
(As well as small rounding errors I have an old £1k Pru avc that might mean figs don't match exactly).

Sorry for all the detail, but thought it might help to illustrate things with some numbers. Am I correct in thinking I could, in principle, access max TFLS for each option in the way described, or should I be focusing on the 6.67*DB? 

 Re this, in "standard values in first screen"..  if you take the 26.3 pension plus 6.66x = 175k lump , that's 96k out of the IB tax-free, leaving 175k (coincidentally the same) "uncrystallised" in the IB and you can take that in any chunks you want later with 25% of each chunk tax-free.   Or, if you take 25% of that 175k at the same time, you have £219k lump, but then the remaining 131k in IB is now crystallised and all income-taxable when you take it out.  So, which is better depends on your expected income pattern after 60, and whether you'll tip into 40% tax taking out the remaining IB.    

Barralad77

Whatever you do, don’t take £175,000 of the money remaining in the IB (after taking the tax-free portion) in one go as most - possibly all of it, depending on your other income in that financial year - will be taxable at 40%. Leave the IB sitting there and take it out in smaller chunks to avoid the 40% tax (or 42% if you’re in Scotland) as far as possible. I think this is what MM is saying, but wasn’t sure of “if you take 25% of that £175k at the same time, you have a £219 lump’. Unless I’ve grossly misunderstood how it works, you can’t ‘take’ the 25% tax-free portion without taking the other 75% at the same time. My reading is that whatever you take out of the IB means it’s ‘crystalized’ and 25% of that is tax-free. In other words, if you took everything out of the IB you would have a lump sum of £350,000, £131,250 of which would be taxable at your nominal rate of tax which, as above, would be 40%. In sum, it won’t be in question whether you would ‘tip into 40% tax’, as that would be guaranteed. That’s my take and apologies to all if I’m muddying the waters.