USS Tax Free Lump Sum and IB

Cobbler_tone

 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.

40% or 45% tax, it’s a lot of tax. I’d hope most people wouldn’t drawn down that amount in one go, unless they are very wealthy, desperate or pretty dumb…or just like paying tax.
I regularly see our bosses being gifted millions of pounds worth of shares for free as part of their package, a week later they sell enough to cover their tax liability, a week after that they sell the lot. Nice work if you can get it.

Barralad77

Of course, there is a tax band higher than 40%. Sadly, that’s never something I’ve ever had to think about

MarlowMallard

Barralad77 said:

 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.

I think you may be able to take the 25% of 175k without taking the other 75%, but you may need to shift it out of USS first into a provider who offer "drawdown".  USS do not offer drawdown, but other providers do.  Then, whenever you take A tax-free, the 3A left behind becomes "crystallized" and income-taxable when you take it out.  

Barralad77

Ahh…I see. Thanks for the clarification. No, USS don’t offer drawdown, you’re right. I’ll be finishing work later this year and am still undecided whether to max out the tax-free element (without RC) or just leave everything in the IB. I will still be getting more than enough cash than I need and my sense is the IB will probably outperform any interest rates I could secure for cash in the next couple of years (especially if Rachel lowers the amount you can put into a cash ISA each year, and the BoE lowers the base rate one or two times later this year). Much of my IB is in the Liquidity fund, and that seems to be trundling along - risk-free, as far as I can tell, as it’s never once dropped in value since I started monitoring it nearly 2 years ago - at around 5%. Even with 15% tax payable on whatever I take out, that’s an equivalent net interest rate of 4.25%. That sounds good to me, right now, but I should probably crunch the numbers to compare to taking more out as cash when I retire.

BoomerGalxza

Thanks again MarlowMallard and Barralad. This has also helped me clear up some things re drawdown options/ tax etc as I'll be looking to bridge to SP.
Quite a lot to consider - time to set up a mega spreadsheet (or maybe even a bit of Python code!) to help with decision making. Actually I have quite enjoyed trying to figure out how the scheme works, mainly helped by insightful posts on this board!