USS Flex and lump sum money

WitchGrobags

Hello

I'm considering taking a pension flex from USS in order to cut my working hours before I get to full retirement, which probably won't be for another 3+ years.

As I understand it, any portion of the Income Builder that I take has to be matched by the same percentage from the lump sum. The quote I had from USS last year also included the small amount I have in the Investment Builder pot. I'm not sure why they did that, but presumably it's something to do with maximising tax free cash?

The thing is, the bit of money from the IB pension is enough(ish), when bolstered with some cash from down the back of the sofa, to top up the gap in earnings until I take another flex, and I don't particularly need or want to take money from the lump sum yet. I don't know if it's possible to take a percentage of the Income Builder lump sum pot and leave the Investment Builder alone for now, but I doubly don't want to take both.

Assuming I go ahead with the flex and have to take some lump sum, I'm wondering what's the best thing to do with that money. Does it make sense to pay it back into the pension via salary over several months (although it would all be going into the IB pot this time)?  Is there a better idea?  I really don't understand enough about any of this to know what the implications are, although I've rung USS twice with questions and watched the presentations that touch on flexible retirement.

If anyone's actually taken advantage of a USS flex and has any other advice, that'd be most welcome too.

ChippyIbe

I suggest you think very carefully about recycling lump sum payments back into pension. It carries heavy HMRC penalties and it doesn't take much to trigger some indicators.

ussdave

I'd take the maximum lump sum you can in terms of investment builder funds as this is a tax break you'll lose out (on the portion of the pension you've taken) if you do not exercise it.  For this part, it's essentially the same as taking the pension in full, so have a read of the USS General Discussion thread if you've not already done so.  

As above, there are rules around pension recycling which you need to be aware of. I'd work on the assumption for now that you'd stick the funds in an ISA or similar, and use it to supplement your income at a later date.

That said, if you have savings there's nothing stopping you salary sacrificing your income and running down those savings.  Are you already salary sacrificing a significant amount?  Do you have savings that you could potentially access already to fund additional contributions?

WitchGrobags

ChippyIbe said:

I suggest you think very carefully about recycling lump sum payments back into pension. It carries heavy HMRC penalties and it doesn't take much to trigger some indicators.

Thanks - I'm aware how almost completely un-aware I am of the potential pitfalls. It's a big learning curve ...

WitchGrobags

ussdave said:

I'd take the maximum lump sum you can in terms of investment builder funds as this is a tax break you'll lose out (on the portion of the pension you've taken) if you do not exercise it.  For this part, it's essentially the same as taking the pension in full, so have a read of the USS General Discussion thread if you've not already done so.  

Thanks, Dave.

So it's not possible to leave the small bit that's in the IB alone, and take it at a future flex/full retirement, without losing out on tax relief?  OK, so that would be why USS automatically included it (although when I asked I was told, "yes, of course you can leave it there") ... and of course, they don't give tax advice ...

WitchGrobags

ussdave said:

As above, there are rules around pension recycling which you need to be aware of. I'd work on the assumption for now that you'd stick the funds in an ISA or similar, and use it to supplement your income at a later date.

That said, if you have savings there's nothing stopping you salary sacrificing your income and running down those savings.  Are you already salary sacrificing a significant amount?  Do you have savings that you could potentially access already to fund additional contributions?

Unfortunately (or fortunately) I'm maxed out on my ISA for this year, so the lump would have to go into some other savings product.

WitchGrobags

ussdave said:

That said, if you have savings there's nothing stopping you salary sacrificing your income and running down those savings.  Are you already salary sacrificing a significant amount?  Do you have savings that you could potentially access already to fund additional contributions?

That was my plan - in so far as I have a plan - whatever I get from the lump sum goes into some sort of savings account, probably one I already have, and hopefully earns a bit of interest while I make AVCs via salary sacrifice over a year (or longer) to the equivalent value, drawing on savings , now augmented by lumpsum, to supplement the reduced salary.  I'm currently only paying the normal pension contribution plus the 1% match, so I think this would bring the SS amount to around £1,200 a month in total, if I do this over a year. I think I read somewhere that there's a limit to how much you can shift this way, but it was quite a high ceiling.

If that's not possible, yes, there are savings I could access and in fact I've wondered whether just living off savings and deferring the pension flex might be a better idea.

ussdave

WitchGrobags said:

ussdave said:

I'd take the maximum lump sum you can in terms of investment builder funds as this is a tax break you'll lose out (on the portion of the pension you've taken) if you do not exercise it.  For this part, it's essentially the same as taking the pension in full, so have a read of the USS General Discussion thread if you've not already done so.  

Thanks, Dave.

So it's not possible to leave the small bit that's in the IB alone, and take it at a future flex/full retirement, without losing out on tax relief?  OK, so that would be why USS automatically included it (although when I asked I was told, "yes, of course you can leave it there") ... and of course, they don't give tax advice ...

Caveat: I'm not that knowledgeable on flexible retirement so some of my statements are assumptions.

You can leave the IB funds where they are and then still get some tax relief later.  Depending on the figures, you may still be able to get all your IB funds out tax free through this method.  But if you don't have enough RB pension left over you could end up paying more tax on the IB funds that you need to.

I've forgotten the exact figure but it's roughly 3.66x the amount in the RB you are taking that can also be taken entirely tax free from the IB.  So let's use some super simple figures and say you've got a total of £20k in your RB and £50k in your IB.  

Assuming you take £10k RB now as part of your flex, 3.66x that would be £36.6k tax free from your IB, leaving £13.4k in there.  When you then take your remaining £20k RB in a few years you'd then be able to get up to £36.6k out of the IB again (if you had that much available), so you'd get all of that initial £50k out tax free.

However, if you opted to leave the IB as it is right now whilst you take your £10k RB, then when you draw your 2nd £10k RB later you'll still have that £36.6k limit (£10k * 3.66) so the remaining £13.4k would be transferred into a separate pot and you'd end up paying tax on 75% of it.

If the very last point is confusing it's because there's also a slightly unusual rule with USS where funds left over from the process of your final drawing RB and IB together count as a separate uncrystallised pot, so 25% of that can be drawn tax free (subject to the usual limits of course).

edit:

https://forums.moneysavingexpert.com/discussion/6580262/uss-flexible-retirement-confusion/p1 - useful thread talking about TFLs

Also, please note, that for the above I've ignored the standard 3 x RB lump sum.  You'd get that too in each case.  I've also not included any options for commutation.

MarlowMallard

It's more flexible than you think.  You can take a percentage of the Retirement Income Builder (defined-benefit) up to 80%, as long as you drop hours by at least 20%;  but you can take from the Investment Builder (defined contribution) any time you like over age 55, and if you only take from Inv.Bldr you don't have to drop hours.  The catch is taking taxable cash from Inv Builder will trigger the MPAA, a limit of 10k per year into pension thereafter. Taking only RIB or tax-free cash from Inv Bldr does not trigger MPAA, though you need to watch out for recycling rules.  

If you take the X percent of ("standard" pension + 3x lump sum)  from Income Builder, you can take an additional X percent of 3.66x lump tax-free from Inv Bldr at the same time,  which is generally a good idea unless you expect excellent growth from the Inv Bldr in future to beat the 15% effective tax rate you'd pay taking the same cash out later on.  Basically when you trigger an annual pension, you can take tax-free cash up to 6.66x pension at the same time. 
You can also commute for less pension / more lump sum or vice versa at a rate of roughly 18k lump to 1k pension, depending on age. 

In my case I halved hours,  took 80% from the Ret Income Builder, commuted down the pension (by about 15%) to get a lump of 6.66x reduced pension, and left the Inv Bldr untouched because that will bridge from full retirement until state pension turns on.   

Sovereign_Hunter_999

I suggest you think very carefully about recycling lump sum payments back into pension. It carries heavy HMRC penalties and it doesn't take much to trigger some indicators.

WitchGrobags

Thanks ChippyIbe ussdave MarlowMallard Sovereign_Hunter_999  I'm going to have to do some reading and try to get my head round the above - tall ask for someone who is marginally dyscalculaic and financial-phobic. For the sake of clarity, amounts involved are, at 20% flex, pension of around £5,600pa from RIB, £17,000 RIB lump sum, plus about £12,000 for the whole Investment Builder pot - about a third of that only in there because of AVCs last year.

Noted that HRMC sees the primary motivation of "pension recycling" as unfairly making gains out of tax relief. Fair enough, but all I really want to do is put back pension money that I don't really want to take at this point - if that's possible.