Pension flex - thoughts please

Daisy_Chaine

Hello - newbie here, very confused and a feeling bit silly as I feel I should be able to get my head around this!

I'm approaching my 63rd birthday, and have been a USS member since the early 2000s, at which point I transferred in around 15 years' worth from SAUL.  While I expect to fully retire around age 65-66, at this point I would like to reduce my hours.

As I understand it the majority (maybe 60%-80%) of my USS pension has an NPA of 60 - based on years of membership. USS haven't been especially helpful with the proportions, and I'm not confident enough of my workings-out to be sure of amounts of money. The rest is age 65, with a tiny proportion having age 66.  Nearly all of it is in the DB section.

While I could probably cope on less income, I'm not keen to do that just now, and would like to continue on more or less the same income as I have now.

Without accessing any pension, I think that reducing my hours by 20% will leave me around £5,600 short of my current take home pay - and I wouldn't have the option of taking pension at a later date unless I reduce hours further. If I take 20% of the pension to supplement income, that still leaves me £2,600 short, which is perfectly doable but still less than I'd ideally like (those figures were based on a quote from USS last year).

I'm lucky in that I do have savings (currently earning around 4% interest) that I could draw on to make up the difference, either with or without the bit of pension - but if I don't take the pension at the same time as reducing my hours, under USS rules I can't opt to do that later.

I've been in this loop of wondering how to do this for at least a couple of years, not confident enough of my workings out and understanding to take the plunge.  I suspect that the amount I'd lose by taking 20-25% of pension early isn't enough to worry about, but there might be other things to take into account, like the effect of 2+ years of reduced contributions. I'd also prefer to leave the lump sum alone, but there isn't an option not to take the same proportion of that, if taking some of the income pension. 

Whether I make up the shortfall from savings or pension might just come down to which is performing better (?), but I really have no idea how to work it out and would be incredibly grateful for views on which is the best way to do it.  

TIA for thoughts on the pros and cons either way.

Triumph13

I would suggest that you start by looking at your total pension income from state pension age, then work backwards from there, rather than starting from your current full time salary.

Your first question therefore is, depending on when you stop working / access your USS pension, how much income would you have at that point and is it enough?  If you feel it isn't enough, even if you work right through to state pension age (SPA), then early retirement is a non-starter and you need to look to cut expenses and/or increase income.  Hopefully that isn't the case!

If you do have some slack in your projected income at SPA, then you can start modelling your different options.  In a perfect world, you'd have enough slack that you could retire tomorrow, using the lump sum and DC sections to bridge the missing years of state pension.  If that's the case, then you are laughing.  If not, then you need to play with the options to see how much longer you need to keep working, how much you can afford to reduce your hours and, possibly, how much you need to cut your current spending to still end up with an acceptable income level at SPA.

Daisy_Chaine

Triumph13 said:

I would suggest that you start by looking at your total pension income from state pension age, then work backwards from there, rather than starting from your current full time salary.

Your first question therefore is, depending on when you stop working / access your USS pension, how much income would you have at that point and is it enough?  If you feel it isn't enough, even if you work right through to state pension age (SPA), then early retirement is a non-starter and you need to look to cut expenses and/or increase income.  Hopefully that isn't the case!

If you do have some slack in your projected income at SPA, then you can start modelling your different options.  In a perfect world, you'd have enough slack that you could retire tomorrow, using the lump sum and DC sections to bridge the missing years of state pension.  If that's the case, then you are laughing.  If not, then you need to play with the options to see how much longer you need to keep working, how much you can afford to reduce your hours and, possibly, how much you need to cut your current spending to still end up with an acceptable income level at SPA.

Thanks Triumph, for that very clear response - and of course that is the logical way to approach it.  I need to reduce my hours this year, though, and intend to drop to 4 days a week. This is less of a concern than it might be given that, by the time I get to full retirement, I expect to be able to access a bit more income from other sources, so I'm as sure as I can be that there will be enough for what I need at full retirement even if I take a modest reduction in hours now. Another way of looking at it is that reducing my hours now might allow me to keep working for longer.

I'm using my current take home pay as my benchmark for what I'm comfortable living on at this point in life, and it should be possible to match that by drawing on savings, or almost match it by taking some pension, without causing too many problems further down the line. 

So - sorry I didn't explain it better - it's less a question about working out whether I can afford to reduce my hours, but the most cost-efficient way to plug the gap between current earnings and a 20% reduced salary.  

Triumph13

It all comes down to what will be more valuable to you in the end - more savings or a higher guaranteed pension?  That is an intensely personal question and will vary based on many factors, such as how well your guaranteed income covers your expected outgoings, your desire to leave an inheritance or to spend money on any big one-off purchases, your attitude to investment risk, whether you have any mortgages or other debts needing to be paid off, etc, etc.

There almost certainly won't be any one right answer, and what's right for you may not be right for someone else.  

I realise that probably isn't very helpful, sorry.  Good luck in working out what feels like the best solution that makes you happiest.

Triumph13

Thanks for starting this thread.  You caused me to look into all the various USS changes to retirement ages, early and late retirement factors, etc. and discover that my wife should really have claimed her small, deferred USS pension from way back when already, rather than waiting another 4 years as we had thought!  We'll be putting the claim in this week

Daisy_Chaine

Triumph13 said:

It all comes down to what will be more valuable to you in the end - more savings or a higher guaranteed pension?  That is an intensely personal question and will vary based on many factors, such as how well your guaranteed income covers your expected outgoings, your desire to leave an inheritance or to spend money on any big one-off purchases, your attitude to investment risk, whether you have any mortgages or other debts needing to be paid off, etc, etc.

There almost certainly won't be any one right answer, and what's right for you may not be right for someone else.  

I realise that probably isn't very helpful, sorry.  Good luck in working out what feels like the best solution that makes you happiest.

Thanks so much for your input - I'm almost literally phobic about addressing this, and have been putting it off for years, so it's good to get the conversation started.  I have no idea, really, as to the best way of filling the gap, but my gut feeling is that I may as well have some of the money now since according to the USS illustrator, the difference in annual pension income is not that great. I did have another thought, though, which is that the small amount that I have in the Investment Builder bit, that's currently not doing very well at all, would go some way towards getting what I want over the next couple of years, so I could potentially take that without accessing the pension itself yet.  The downside of doing that is that I'd have to reduce hours further in order to access a pension flex further down the line.

Triumph13

The other downside is that it wouldn't be tax efficient.  If you take the investment builder on its own, then you'll pay tax on 75% of it.  If you take it with the DB section, then you should be able to take all of it tax free.

I suspect that taking a decent chunk of your pension early will be the right answer.  If I'm reading the USS rules correctly, the element that had an NRA of 60 doesn't increase for late payment until you turn 65, so you are effectively losing money on that by not taking it.  You're so close to 63.5 that you are effectively only being hit with early retirement penalties for your post 2011 service.

I might be tempted to do something like cut your hours by 20%, but take say 50% of your pension and your DC funds as tax free cash.  If that gives you a net increase in income, then pay the extra back in as AVCs to the investment builder pot and take it back out tax free when you fully retire.

Daisy_Chaine

Triumph13 said:

The other downside is that it wouldn't be tax efficient.  If you take the investment builder on its own, then you'll pay tax on 75% of it.  If you take it with the DB section, then you should be able to take all of it tax free.

I suspect that taking a decent chunk of your pension early will be the right answer.  If I'm reading the USS rules correctly, the element that had an NRA of 60 doesn't increase for late payment until you turn 65, so you are effectively losing money on that by not taking it.  You're so close to 63.5 that you are effectively only being hit with early retirement penalties for your post 2011 service.

I might be tempted to do something like cut your hours by 20%, but take say 50% of your pension and your DC funds as tax free cash.  If that gives you a net increase in income, then pay the extra back in as AVCs to the investment builder pot and take it back out tax free when you fully retire.

Thank you! Tax efficiency is one of the many things I really struggle to get my head around, so that thought would have completely passed me by. And yes, I think that must be right that the factors for early retirement would only apply to the relatively small bit of pension that has an NPA of 65, and the tiny bit that has 66. So, while the exact impact of that is, for me at least, unknowable, it surely can't be much.

Your last para is more or less exactly what I'd been thinking of doing, ie taking a larger proportion of pension than hours reduction, and paying some of it back into the Investment Builder. That seems like a fair option as I'm almost certainly overestimating what I'll actually need.

Daisy_Chaine

Daisy_Chaine said:

Triumph13 said:

You're so close to 63.5 that you are effectively only being hit with early retirement penalties for your post 2011 service.

Ah. Took me a while to work out the significance of age 63.5, but I think that it only applies if you were 55 or over in October 2011 ... I wasn't, so the ERFs still apply. But this is all so, so difficult to understand!