USS - please tell me this is not as bad as it looks.

owlowlowl

Clueless again here! Very grateful for any help.

Husband and I are getting on top of pensions way too late in the day. Both USS. Husband earns £85,414 a year gross. We have not paid in any AVCs to date. He is about to turn 53. 

Current retirement projection at 66 is DB £36,357, lump sum £109,072, investment builder £102,489.

We are modelling what happens if we pay in £2800 a month extra, making use of his tax relief at 40%. 

DB and lump sum stay the same of course. Investment builder goes up to £567,139. 

So the difference is £464,650. 

The number of months he has to go until he is 66 is 156.

So if we divide £464,650 by 156, then we get £2978.

This is barely ANY return on the AVC contributions over a 14 year timeframe. With inflation, it's probably a loss. 

This is with the standard investment return assumptions. 

Am I doing something wrong in these sums? Am I wrong to conclude that a global equities SIPP would be a WAY better investment? 

Dazed_and_C0nfused

owlowlowl said:

Clueless again here! Very grateful for any help.

Husband and I are getting on top of pensions way too late in the day. Both USS. Husband earns £85,414 a year gross. We have not paid in any AVCs to date. He is about to turn 53. 

Current retirement projection at 66 is DB £36,357, lump sum £109,072, investment builder £102,489.

We are modelling what happens if we pay in £2800 a month extra, making use of his tax relief at 40%. 

DB and lump sum stay the same of course. Investment builder goes up to £567,139. 

So the difference is £464,650. 

The number of months he has to go until he is 66 is 156.

So if we divide £464,650 by 156, then we get £2978.

This is barely ANY return on the AVC contributions over a 14 year timeframe. With inflation, it's probably a loss. 

This is with the standard investment return assumptions. 

Am I doing something wrong in these sums? Am I wrong to conclude that a global equities SIPP would be a WAY better investment? 

If he is a really contributing an extra £2,800/month and receiving 40% tax relief on the whole of that contributions then the real cost is only £1,680/month.

You appear to be assuming the real cost is £2,800 not £1,680.

I don't know much about USS but if "investment builder" is a DC accompaniment to the main DB scheme isn't there a global equities type fund he could choose to invest in with the USS DC scheme?

owlowlowl

I realise about the real cost, but we would get that '£2800 for £1680' a month in a SIPP also, wouldnt we? (I realise that it might be a bit less because of NICs, but this would be about £1k a year I think). 

For comparison, the compounding figure for a 6% return over 14 years is £725,319.86. Which is just so much higher.

My concern is that we have £2,800 going in and hardly any more coming out in a 14 year time frame. 

QrizB

owlowlowl said:

Clueless again here! Very grateful for any help.

OK - it's not as bad as it looks.

owlowlowl said:

We are modelling what happens if we pay in £2800 a month extra, ...
So the difference is £464,650. 
The number of months he has to go until he is 66 is 156.

That's a roughly 1% annual return. However ...

owlowlowl said:

This is with the standard investment return assumptions.

There's the "problem". I don't know what USS uses as it's standard assumptions for AVC returns, but I'm going to guess it's fairly conservative. Can you check what those assumptions are?

owlowlowl said:

Am I wrong to conclude that a global equities SIPP would be a WAY better investment? 

A SIPP projection using the same assumptions that USS has used would give you the same number.

What are the USS AVC investment options? How is your AVC currently invested, and how did you choose those funds? If there's a global equity fund available, it should give a similar return to a global equities fund in a SIPP.

Dazed_and_C0nfused

owlowlowl said:

I realise about the real cost, but we would get that '£2800 for £1680' a month in a SIPP also, wouldnt we? (I realise that it might be a bit less because of NICs, but this would be about £1k a year I think). 

For comparison, the compounding figure for a 6% return over 14 years is £725,319.86. Which is just so much higher.

My concern is that we have £2,800 going in and hardly any more coming out in a 14 year time frame. 

He might be paying over £2,800 but if he is avoiding over £1k in higher rate tax each month I don't think that's something you should be ignoring in your calculations.

Can you clarify how you have worked out the supposed return on his contributions to end up with £464,650 (from making the extra contributions)?

owlowlowl

Dazed_and_C0nfused said:

He might be paying over £2,800 but if he is avoiding over £1k in higher rate tax each month I don't think that's something you should be ignoring in your calculations.

Can you clarify how you have worked out the supposed return on his contributions to end up with £464,650 (from making the extra contributions)?

I'm confused by the first point. Firstly, don't SIPPs have the same tax relief as employer pensions? I thought you could claim the tax back in either case?? 

(Is there also an option to avoid the tax, pay into the DC element and then transfer the DC annually to a SIPP? Or would this be naughty and wrong?)

The £464,650 is the USS projection from their benefit calculator. 

@QrizB

"There's the "problem". I don't know what USS uses as it's standard assumptions for AVC returns, but I'm going to guess it's fairly conservative. Can you check what those assumptions are?"

According to their website this assumes
- inflation 2.5%
- there are no salary increases above inflation
- investment returns are 'standard'. (This is not explained ANYWHERE).

Here's the thing: we have literally just put in an AVC of £1000 pcm which we've asked them to invest in the USS growth fund, which is an equities-based fund with high risk, high rewards. It's achieved 60% growth over the last 7 years. So I cannot for the life of me understand why we are only getting a 1% return in all the modelling.

Are our AVCs just paying off their deficit??! 

QrizB

owlowlowl said:

So I cannot for the life of me understand why we are only getting a 1% return in all the modelling.

It's just a synthetic projection, based on their assumptions. It's designed to be pessimistic so people don't complain if their funds do worse than it.

If you're happy with the growth fund, stick with it. If you're not happy, switch to a different one.

owlowlowl said:

Are our AVCs just paying off their deficit??!

No.

Dazed_and_C0nfused

owlowlowl said:

Dazed_and_C0nfused said:

He might be paying over £2,800 but if he is avoiding over £1k in higher rate tax each month I don't think that's something you should be ignoring in your calculations.

Can you clarify how you have worked out the supposed return on his contributions to end up with £464,650 (from making the extra contributions)?

I'm confused by the first point. Firstly, don't SIPPs have the same tax relief as employer pensions? I thought you could claim the tax back in either case?? 

(Is there also an option to avoid the tax, pay into the DC element and then transfer the DC annually to a SIPP? Or would this be naughty and wrong?)

The £464,650 is the USS projection from their benefit calculator. 

@QrizB

"There's the "problem". I don't know what USS uses as it's standard assumptions for AVC returns, but I'm going to guess it's fairly conservative. Can you check what those assumptions are?"

According to their website this assumes
- inflation 2.5%
- there are no salary increases above inflation
- investment returns are 'standard'. (This is not explained ANYWHERE).

Here's the thing: we have literally just put in an AVC of £1000 pcm which we've asked them to invest in the USS growth fund, which is an equities-based fund with high risk, high rewards. It's achieved 60% growth over the last 7 years. So I cannot for the life of me understand why we are only getting a 1% return in all the modelling.

Are our AVCs just paying off their deficit??! 

Different methods of contributing generally end up with the same result, just in different ways.

But according to your other thread he isn't going to making these contributions he will be sacrificing salary in return for extra employer contributions.  They have the advantage of avoiding both tax and NI.  So sacrificing £2,800/month might only cost him £1,624 in reduced take home pay.

owlowlowl

QrizB said:

owlowlowl said:

So I cannot for the life of me understand why we are only getting a 1% return in all the modelling.

It's just a synthetic projection, based on their assumptions. It's designed to be pessimistic so people don't complain if their funds do worse than it.

If you're happy with the growth fund, stick with it. If you're not happy, switch to a different one.

So the projection really bears no relation to what we will actually get?! How are we supposed to plan for retirement if it's so pessimistic that it's just completely unrealistic? 

Just so I understand, why is sticking with this better than taking the money out and investing in a global equities SIPP and claiming the tax relief back?

dunstonh

This is with the standard investment return assumptions. 

There is no such thing as standard investment return assumptions.      The projections will use assumptions based on the underlying assets to give a gross rate of return.   Then it will deduct a percentage for charges and then a deduction of 2% or 2.5% for inflation.

Am I doing something wrong in these sums? Am I wrong to conclude that a global equities SIPP would be a WAY better investment? 

Whilst factsheets and data sources assume growth after charges, projections use assumptions before charges.  

SIPPs use the same projection methods.

Projections are synthetic and an investment with a history of returning 8% p.a. could use the same projection assumptions as another investment with a history of returning 2% p.a.    Projection rates tend to be pessimistic.

Plus, you appear to not be taking the inflation assumption into account.

QrizB

owlowlowl said:

So the projection really bears no relation to what we will actually get?! How are we supposed to plan for retirement if it's so pessimistic that it's just completely unrealistic? 

The projections you get with a SIPP provider are similarly pessimistic.

owlowlowl said:

Just so I understand, why is sticking with this better than taking the money out and investing in a global equities SIPP and claiming the tax relief back?

With salary sacrifice you get the NI saving too, as D&C points out above.
No-one can say whether the AVC funds you choose will do better or worse than any particular combination of SIPP funds.