USS pension - taking maximum TFLS in Scotland?

gonalpoor

Hi all,
     I'm going to be taking VSS from a Scottish university this summer and intend to take retirement at the same time. I've been mulling over whether to take the standard pension offering and 3 x pension TFLS or to take the slightly smaller pension and maximum TFLS. My concern with taking the standard pension offering is that when I start receiving the state pension at 67, as I live in Scotland, almost all the additional pension I'd receive (over taking the pension I'd receive if I took the max TFLS) would be subject to 42% tax. I produced a simple spreadsheet that appears to show that taking the maximum TFLS, in my situation, is a no brainer. 

Apologies if this has already been discussed, but I haven't managed to find any similar question in the forums.

Am I missing something obvious? 

Thanks!

DRS1

What would you do with the TFLS?  Will it all fit in an ISA?  Or premium bonds?  Or short dated low coupon gilts? Or is it going to be generating a taxable income?  Will it all be gone by the time the state pension kicks in?

There are plenty of threads on here about commutation factors cross over points etc when it comes to taking the TFLS.  A surprising number of people argue against taking the maximum TFLS.  It would be worth your while having a look to see if anything resonates.

DRS1

Here's one
Civil Service Pension legacy lump sum to max out or not — MoneySavingExpert Forum

Asimovs_nightfall

I am in a similar position, although in England. I think, as indicated above, if you have a purpose (ie a property or gift it to children) for maximising your TFLS and that is founded on logic/evidence, then there is a case for it. Alternatively, if you are worried about the tax implications, then the interest accrued on any TFLS invested may take you to the same position, so you need to do some sums to figure out.  Either way, a bit of research is probably needed.

uss_hamish

I don't think there's anything obvious about it - it depends quite sensitively on your own circumstances. That Civil Service thread talks about commutation factors of 12 which is nothing like what we have in USS: https://www.uss.co.uk/for-members/calculate-your-benefits/factors-used-by-uss

One way to think about it: consider taking a lump sum of £1000, from which according to the 4% rule of thumb, you could reasonably expect to take £40pa, adjusting each year for inflation, and not run out after 30 years. (The 4% rule is very rough and ready of course.) Compare that £40 with the extra income you'll get by foregoing that £1000 and taking the annual income instead. Then factor in, in favour of the income, that the scheme is taking the investment risk and the longevity risk (you get the income, adjusted by [most of?] inflation, as long as you live, regardless of what happens in the markets), and in favour of the lump sum, that you have it to spend as a lump if you ever want it, and that if you die earlier than expected it lands in your estate instead of being gone (or half gone if you have a spouse/civil partner). [ETA warning, not having a spouse or civil partner myself I haven't checked that commuted income contributes to the spouse's pension actually, maybe it doesn't, check if this matters to you.] There may be other differences too, depending on your personal circumstances. Don't allow the tax tail to wag the investment dog, but you'll presumably be paying dividend or capital gains tax on at least some of what you get from the lump sum, and income tax on what you get from the income; the former's a bit less.

Third option: I used to think it might be worth leaving a lump in the Investment Builder to grow tax-free and avoid inheritance tax if I didn't ever need it, but of course that advantage is about to go. Right now I don't see why I'd leave anything in the IB rather than either taking it as lump sum or commuting it to income, but there might be circumstances when that still makes sense, too.

DRS1

Interesting that they warn you the commutation factors are going to get worse in October.  Just as well the OP is going before then.

uss_hamish

Depends which way you're going, whether it's getting better or worse! Both kinds of factors (commutation, i.e. giving up pension to get lump sum, and reverse commutation, i.e. giving up lump sum to get pension) are going down. In the former case, where you multiply pension by factor to get lump sum, that means you get less lump sum than previously; in the latter, though, where you divide lump sum by factor to get pension, that means you get more pension than previously.