USS - to TFLS or not, and tax implications

WillC999

Hi all,

I'm just pondering my USS pension (all DB). I can take TFLS, or not, and get a higher monthly amount. The max TFLS is 25% of the pot. My question - which bizarrely I cannot find an answer to on the USS website - is, if I choose *not* to have any TFLS, are the monthly payments taxed at 75% (i.e. the equivalent to a single TFLS)? I'm assuming this is the case, but it's kind of important so thought I would check.

I'm also assuming that the Chancellor *could* meddle with/remove the TFLS, and thus *could* also do the same to any tax free component of the monthly payment? 
 
Thanks

Cobbler_tone

No. A DB pension doesn't work like that. It will all be taxable income if you don't take the PCLS.

Ayr_Rage

WillC999 said:

Hi all,

I'm just pondering my USS pension (all DB). I can take TFLS, or not, and get a higher monthly amount. The max TFLS is 25% of the pot. My question - which bizarrely I cannot find an answer to on the USS website - is, if I choose *not* to have any TFLS, are the monthly payments taxed at 75% (i.e. the equivalent to a single TFLS)? I'm assuming this is the case, but it's kind of important so thought I would check.

I'm also assuming that the Chancellor *could* meddle with/remove the TFLS, and thus *could* also do the same to any tax free component of the monthly payment? 
 
Thanks

Your monthly payments from a DB pension are taxed as normal income.

There is NO tax free element to the monthly payment, it just uses up the usual personal allowance and then is taxed just as if your were employed.

You do not pay any NI on pension income.

WillC999

OK, this is significant, and feels slightly harsh - if you don't take the initial TFLS then you miss out on the 25% saving! So why would anyone *not* take the TFLS?

I know you need to do something with it (like shove it in shares/savings to make interest) but it's the only way to get your tax free cash!

Edit: I think I am getting muddled, with the USS DB it's a balance of TFLS and higher/lower monthly payments... but there's still the issue of which is better in the long run, which I guess boils down to how  much tax one might pay in the future (rates etc). 

Barralad77

Can’t see why it’s ‘harsh’ if you decide to not take up the offer? That aside, someone might exchange the tax-free cash for a higher, guaranteed, index-linked pension. For some, that greater certainty will be better than ‘gambling’ on interest rates or investment returns. For others, it might be because they already have enough cash swashing around. I recommend sitting down with a calculator and working out what the difference(s) would be for you, in your situation.

WillC999

Further to my confusion above, a bit of simple maths tells me that after about 20ish years, the TFLS vs annual amount calculator comes to about the same. So the issue boils down to annual income and tax etc, i.e. having  an annual income which doesn't push you into the 40% tax band. 
Apologies if this is/was obvious, but it wasn't to me until now.

Ayr_Rage

Which is better in the long run is a purely individual choice.

Whether the PCLS (tax free) is good value also depends on the commutation rate of the scheme, which is how much you get for giving up each pound of pension.

Rather than relying on snippets of information here suggest you take some time to read the documentation from the USS scheme.

Edit : With most schemes you do not have to take the full PCLS so you can balance the lump sum/pension ratio.

ussdave

Would recommend reading through the USS general discussion thread.  Should be able to find it by searching.

Generally speaking taking the standard 3x lump sum + any tax free cash it allows you to draw from the IB is a good idea.  Commuting TFLS isn't great, but not awful, and really comes down to what suits you better.

WillC999

Ayr_Rage said:

Which is better in the long run is a purely individual choice.

Whether the PCLS (tax free) is good value also depends on the commutation rate of the scheme, which is how much you get for giving up each pound of pension.

Rather than relying on snippets of information here suggest you take some time to read the documentation from the USS scheme.

Well I'd say the USS info has been generally poor, for example it was only recently they made clear that the figures quoted in the calculator are in today's terms. I will do some more reading though.  

WillC999

Worth adding that @55 the pension is 13k (no lump sum) which I am viewing as a sort of annuity to cover basic expenditure (SIPP will handle fun). Retiring early means there is a reasonable likelihood of making the 20 years of equivalence to a lower pension plus lump sum. Also the relatively low pension means that hitting the 40% threshold can be managed fairy easily. Which seems to make sense to me. 

Cobbler_tone

WillC999 said:

Further to my confusion above, a bit of simple maths tells me that after about 20ish years, the TFLS vs annual amount calculator comes to about the same. So the issue boils down to annual income and tax etc, i.e. having  an annual income which doesn't push you into the 40% tax band. 
Apologies if this is/was obvious, but it wasn't to me until now.

It's exactly what the forum is for, to increase understanding of how pensions and specific schemes work.
FWIW I will take some of my lump sum but not all of it (not USS). It is a balance of what you want/need, whilst securing the income you want, along with the relevant linked rises each year. 

I would say the 'general' feeling you get from the forum is to not take the tax free cash unless you need it....but it is a lot, lot more complicated than that and down to personal choice. I'm sure your overall financial plan and personal situation is different to the next person.

You haven't mentioned any investment builder and if you have that too would definitely head to the USS thread.