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

Johnnyboy11

That 60% growth over the past 7 years is in nominal terms. With UK RPI having risen by 43% over the same period, the real return is 17%, or about 2% per year. Presumably the USS projection is expressed in real terms and at today's prices?

owlowlowl

Johnnyboy11 said:

That 60% growth over the past 7 years is in nominal terms. With UK RPI having risen by 43% over the same period, the real return is 17%, or about 2% per year. Presumably the USS projection is expressed in real terms and at today's prices?

I feel very stupid.

I don't understand this point at all. I am clearly not grasping something really critical about this idea of a projection.

From my benighted perspective - assume I have a level of investment knowledge equivalent to a 9 year old - 

The sum I am investing is the same: £2800 pcm. 

The 'outcome sum' I am getting is a raw number. In one case (USS) that number is £567,139. 

If I put £2800pcm into a compound interest calculator at 6% I get £724,320.

Both are calculated over the same time period, so won't inflation be the same? In both cases, the sum will be worth a lot less than it would be today. But one sum is still substantially bigger than the other. 

I don't think the USS projection IS adjusted for real terms/today's prices - there is nothing about this on their calculator. It is literally "This is what you will get out". 

Dazed_and_C0nfused

owlowlowl said:

Johnnyboy11 said:

That 60% growth over the past 7 years is in nominal terms. With UK RPI having risen by 43% over the same period, the real return is 17%, or about 2% per year. Presumably the USS projection is expressed in real terms and at today's prices?

I feel very stupid.

I don't understand this point at all. I am clearly not grasping something really critical about this idea of a projection.

From my benighted perspective - assume I have a level of investment knowledge equivalent to a 9 year old - 

The sum I am investing is the same: £2800 pcm. 

The 'outcome sum' I am getting is a raw number. In one case (USS) that number is £567,139. 

If I put £2800pcm into a compound interest calculator at 6% I get £724,320.

Both are calculated over the same time period, so won't inflation be the same? In both cases, the sum will be worth a lot less than it would be today. But one sum is still substantially bigger than the other. 

I don't think the USS projection IS adjusted for real terms/today's prices - there is nothing about this on their calculator. It is literally "This is what you will get out". 

You don't normally get interest on pension funds, they are usually invested instead and in the long term this will typically provide a better return than interest paid in cash deposits.

But there are peaks and troughs along the way, if you are lucky you happen to invest when (fund/stock) prices are low and see good returns.  That beat cash.

QrizB

owlowlowl said:

The 'outcome sum' I am getting is a raw number. In one case (USS) that number is £567,139. 

That number is a projection using USSs internal assumptions. It bears very little relationship to what you'll actually have in the pot in 13 years time.

owlowlowl said:

If I put £2800pcm into a compound interest calculator at 6% I get £724,320.

That number is a calculation assuming you can get 6% compounded annual growth with zero risk. Which I don't think actually exists as an investment product you can buy today in a SIPP.

owlowlowl said:

In both cases, the sum will be worth a lot less than it would be today. But one sum is still substantially bigger than the other.

But they have been calculated using different assumptions and neither is "correct". I would be shocked if your husband's AVC is worth either of those amounts in 2038.

As I said on your other thread, your AVC is up 60% in seven years. Why are you now convinced it's only going to increase by 1% pa in the future?

owlowlowl

QrizB said:

That number is a projection using USSs internal assumptions. It bears very little relationship to what you'll actually have in the pot in 13 years time.

But they have been calculated using different assumptions and neither is "correct". I would be shocked if your husband's AVC is worth either of those amounts in 2038.

Thank you Qriz. Thank you Dazed.

I am a bit panicky.

I was severely ill for a 12 years in my 30s. Still here, by the skin of my teeth, for which I'm really grateful. But I have very little in the way of pension. I'm 47 about to turn 48. I'm back at work full time now and doing my best to climb the ladder, but I have no real pension.

We just don't have enough saved for retirement and it's completely my fault we are in this position. Neither of us is going to inherit anything so we have to sort this out ourselves. I don't want my husband to be affected by my situation - I know he'd love to retire a bit early, and I feel like I need to make that happen for him. 

We need to find a way of generating a lot more money quickly. I need to know that these AVCs are going to be worth substantially more than this projection is telling me, or basically I don't think I will ever be able to retire. Academia is one of those places where you tend to be forced out after a certain age, so I genuinely don't know what I will do for money, or who will take someone in their 70s who needs to keep working.

dunstonh

Both are calculated over the same time period, so won't inflation be the same? In both cases, the sum will be worth a lot less than it would be today. But one sum is still substantially bigger than the other. 

future inflation will be whatever future inflation will be.  You don't know the figure.
USS will use an assumption rate in their figures.  So, they deduct that assumped inflaton rate from the gross assumption projection rate. 
You haven't taken any deduction from your 6% projection to reflect inflation.

Pension projections will also deduct charges from the gross projection rate.  Again, you have not deducted any charges from yours.   Instead, you have used the net return after fund charges (but not SIPP provider charges).   

You have used 6% but the USS wont use a projection rate that high.    Again, like inflation, returns will be whatever they will be but you don't know in advance.    The 10-year period of 2000 to 2009 saw equities around 20% lower than at the start.    Whereas the last decade has doubled or more.       Using either period as a reference point for projections would be silly as one period was extremely bad and the other was extremely good.  Neither represents the median nor the more statistically likely outcome.    So, they use something in between with a bit of pessimism to be on the safe side.

Cobbler_tone

I think you are trying to model something which is way, way too far out.
The additional sacrifice is a good think to reduce his tax burden. You have investment choices in the IB. As to whether that is better or worse than other schemes is subjective (to an extent), but unless you are a whizz then you just need to make the appropriate choice for your risk appetite. It also saves the hassle by contributing via SS.

We both contribute heavily to our pensions and for example my tax bill dropped from £15k to £7k across the subsequent tax bill. It's very sensible if you have the net affordability, especially once you are in your 50's and it becomes a bit more tangible.

I'd say you are in a good position, don't you fancy retiring a bit earlier?

kermchem

I am a bit older than OP's OH, on a lower pay grade and getting close to retirement from USS. I am shovelling enough of my salary into the Investment Builder as additional contributions through salary sacrifice each month to get my taxable income this year under the 40% threshold - my additional contribution is comparable to what OP's OH is proposing.

Contributions to the IB are invested with the management charges covered by the USS scheme, unlike in a SIPP.

You can pick riskier, potentially higher yielding funds to invest in.

The modeller allows you to see the impact of additional monthly contributions, which it describes as "monthly contribution from my salary", and I am going to rashly assume with no evidence that most USS employers are using salary sacrifice. There is a separate part of the uss website (not the modeller) where you can enter the contributions for USS to ask your salary office to deduct.

If you use the modeller to see the impact of your additional contributions then the modeller assumes inflation of 2.5% (but you can change it)

Modeller assumes salary increases of 0% relative to inflation, but again you can change that (though it refuses the negative number we have been given this year, strike ballot coming), 

Modeller offers three assumptions of investment returns "More optimistic", "Standard" and "Less optimistic", I think these are 3, 5 and 8% but can't find them written down, the modeller uses Standard as default. My non-expert understanding is that if you met with an IFE/FA to discuss setting up a SIPP then by regulation they can only use the same numbers as projections.

Triumph13

owlowlowl said:

We need to find a way of generating a lot more money quickly. 

What you need is to match your expenses to your likely income. You are on target to have two state pensions and your USS DB income.  Many people have very happy retirements on less than that. Add £0.5M in AVCs and it should be easy to retire early and comfortably. You just need to cut your cloth accordingly.

owlowlowl

kermchem said:

I am a bit older than OP's OH, on a lower pay grade and getting close to retirement from USS. I am shovelling enough of my salary into the Investment Builder as additional contributions through salary sacrifice each month to get my taxable income this year under the 40% threshold - my additional contribution is comparable to what OP's OH is proposing.

Thank you so much @kerchem. I'm really grateful to you for clarifying that it is a projection and how it's calculated. 

And I'd love to retire earlier but I just can't see how I'll ever be in a position to do that.