Another USS with Voluntary Severance Query

Asimovs_nightfall

Apologies, I have another USS query and would appreciate some views please from our informed colleagues on this forum.  

I have been offered ‘voluntary severance’ (VS) and want to ensure if I take it, it is most efficient in respect of the payout and my USS pension.  The date for the VS is yet to be determined, but I expect it either at the end of June or beginning of July.  Now, I hit 66 at the end of July and of course, at this point I am eligible for my state pension.

I cannot add anything from the VS payment to the pension at the point of receiving the VS and the VS payment is not considered as eligible earnings for pensionable purposes.  The pension people at the university have told me this.

Here are the questions.

First, is it worth putting a lump sum into my pension before the VS?  For example, let’s say the VS is £65k.  Take out the tax free part of VS, leaving £35k subject to tax.  Let’s assume 25/26 year earnings to the VS are £20k and I have made £5k pension contributions.  Is it possible to stick a proportion of the £35k, in this case £15k, into the pension beforehand by using savings, and what tax benefits does this bring?  Or is better to simply use the £35k in some other way, such as part of it in an ISA?

Second, what sort of ERFs do I need to consider if I draw on my pension one month before I hit 66?

Not withstanding the modeller disappointment from this week, thanks in anticipation of any comments.

As.

Asimovs_nightfall

Anyone offer any advice, point of view at all?  Those fantastically informed people we have on her like @ussdave @Universidad @MPLMPL and @bluenose1 and others, before the post disappears into oblivion and I'm left to my own devices    

ussdave

A couple of follow up Qs:

1. How much do you currently have in your Investment Builder (IB) (and Retirement Builder (RB), for that matter)?
2. How much of your 'service' (time in USS) is pre 2011?  It's possible that you can take these benefits unreduced if you take your USS pension immediately, thereby avoiding a large amount of ERFs on pension accrued pre-2011.  This is a no brainer if it applies to you so definitely worth checking this with USS too.  You'll lose the opportunity once you are no longer an employee, so this is a key thing to check.

It's very likely that putting extra money into your IB will be beneficial by offering you an increase in your total tax free cash.  I'd personally put my pension payments to the maximum from salary and live off your savings.  If you are salary sacrificing and therefore limited (e.g. can't go below National Minimum Wage (NMW)) then you could also consider topping IB directly from savings but I'm not entirely sure how the tax relief works on such payments.

Are you aware of the option to "combine" your IB and RB together at the point of drawing your pension, which can allow you to take a lot (sometimes all) of your IB as tax free cash?  It's a really good benefit that I'd recommend making the most of.

Edit: I'm not around much at the moment but hopefully the above can at least get you started in the right direction. Hopefully others will chime in too, and I'll reply again when I can.

ussdave

Actually, as you're almost 66, the vast majority of your USS RB benefits will be unreduced: https://www.uss.co.uk/for-members/glossary#Glossary_NormalPensionAge

I can't quite remember when the NPA changed to 66 but I'm sure it wasn't that long ago.  Chances are you'll have only tiny reductions on your pension if you take it immediately.

Barralad77

I believe the NPA rose to 66 in April 2020, so it will only be the contributions made since then that will be subject to an ERF. The current ERF for finishing one year early is 94.8 (I.e., a deduction of 5.2% on the unreduced value) but as you will be finishing only one month before turning 66 then I suspect it will only be around 1/12 of that figure (I.e., approx. 0.4%; can’t say for sure as the calculations are not ‘linear), resulting in an effective ERF of around 99.6. The bottom line is that what you will get will be extremely close to the full - unreduced - valuation.

13FL

Would anyone be able to point me in the direction of further clarification on the following point made by @ussdave

1. How much of your 'service' (time in USS) is pre 2011?  It's possible that you can take these benefits unreduced if you take your USS pension immediately, thereby avoiding a large amount of ERFs on pension accrued pre-2011.  This is a no brainer if it applies to you so definitely worth checking this with USS too.  You'll lose the opportunity once you are no longer an employee, so this is a key thing to check.

I will be leaving USS this July (via VS, age 61), but was going to defer taking pension until next tax year. I will have over 20 years contributions to USS pre 2011 so the above may be a relevant consideration for me. The modeller does not show a drop in numbers if I play with the dates (i.e. indicate when propose to take pension and then add when leaving USS).

Thanks for any advice - lots of very helpful discussions on here.

Barralad77

I believe this refers to the situation where your pre-2011 contributions do not have an ERFapplied if you take the pension at the point of leaving (I.e.l those contributions are deemed to have an associated NPA of 60, so as you are 61 already no ‘penalty’ would be applied. However, if you defer taking the pension (in your case, by a year) then you ‘lose’that NPA of 60; instead, those contributions will have an NPA of 63.5 associated with them. In which case, an ERF will be applied. You can calculate what that will be by seeing how long before 63.5 you will be next April. For example, if you turn 62 next April, having deffered taking you pensions after leaving work this year, then the ERF for 1.5 years will be applied. At least that’s my understanding of how it works. Best to check with USS, in any case.

13FL

@Barralad77 Thank you for the clarification, I think I understand this now but as you suggest a call with USS may be in order. My spreadsheets keep getting more complicated and difficult to fully determine the best approach.

Twigwidge

@Asimovs_nightfall

You say "I cannot add anything from the VS payment to the pension at the point of receiving the VS and the VS payment is not considered as eligible earnings for pensionable purposes.  The pension people at the university have told me this."

I am taking VES from my uni at end of this July and this involves a years salary, and I have been offered the opportunity of having the first £30K (which is obviously tax free) paid into my bank acount and the remainder into the investment builder portion of my USS pension. 

This seems very different to the advice that you have had, unless I am misunderstanding what you are saying?

Asimovs_nightfall

Thank you everyone, very informed as usual and helpful.  In response:

@ussdave Yes, I can see the points you make. I intend to put some into the pension from my VLS.  The key however to how much and that according to my institution, I will be limited in terms of pensionable pay determining how the limit of what I can put in.  See below on this.

It's been confirmed today that it should be at 66 when the VLS comes into operation, so that addressed any even minor ERFs concerns.  ( @Barralad77 too) 

@Twigwidge this is the communication I have received: "I can confirm a voluntary severance payment would not included in your pensionable pay." [sic]   So pretty unequivocal in that, but it might be worth me questioning.  Also, wouldn't be surprised to see us both at the same institution with different responses!  

@13FL  as @Barralad77 suggests the staged ERFs are confusing. I would ask USS for clarification.

Twigwidge

@Asimovs_nightfall
Definetly question this, I have just asked for my final pension quote directly from USS and they confirmed I can pay any amount from my VES payment into the investment builder portion of my pension and they even asked me how much the Uni had agreed to pay in as a VES settlement along with my final salary to provide me with the most accurate final quote.
The beauty of doing this is that I can then choose to take all of my investment builder as part of my tax-free lump sum or leave it invested (It makes sense to me to grab it tax free)
I think what your institution may mean is that you can't use the VES settlement to boost the defined benefits part of your pension

If you do a Google search "Can I pay voluntary severance money into the investment builder portion of my USS pension"

The Google AI replies with the following, which tallies with what USS and my institition have told me

Yes, you can pay a voluntary severance payment into the Investment Builder portion of your USS pension, which is the defined contribution part of the scheme, and these contributions will benefit from tax relief. 

Here's a more detailed explanation:

• Investment Builder:

  The Investment Builder is the defined contribution (DC) part of the USS pension scheme, where you can save additional funds beyond the standard Retirement Income Builder. 

Voluntary Contributions:

You can make additional contributions to the Investment Builder, either as regular contributions or as one-off payments, according to the USS website. 

My severance package contract states  

The first £30,000 of the balance of the Termination Payment will be paid tax-free, as a termination award to which section 403 of ITEPA 2003 applies but which falls under the threshold stipulated in that section.

The remaining £xx,xxx of the Termination Payment will be paid directly into the Employees’ pension as an additional voluntary contribution and will not be subject to any tax deductions.

Hope this is some help