Close to LSA and likely higher rate in retirement -- am I overlooking anything?

guymo

I'm a USS member. At present the USS benefit modeller suggests that at my planned retirement age in around 7 years time I would be able to take an income of £37k and lump sum of £250k. The modeller gives figures in 2026 terms (subject to a lot of assumptions of course.)

What the modeller does not model is the changes to lump-sum allowance i.e. no change, meaning a reduction in 2026 money.

Taking this very roughly into account, and commuting some lump sum for pension, I could end up with around £40k pension and the maximum lump sum. £40k is also going to be somewhere around the higher-rate tax threshold by then. A few years after the planned retirement date I will be entitled to the full state pension.

Our household expenses are about to drop quite a bit when one of our beloved offspring starts earning money (!!!) so I am considering whether to save more into a pension or do something else.

Given that I am on course to max out my basic rate allowance and lump sum allowance, my feeling is that I shouldn't make any additional contributions to pensions:

• further contributions will get higher rate relief on the way in but be taxed at higher rate on the way out
• my USS contributions are by salary sacrifice so there is a 2% advantage, but I have ISA allowance to use up and I feel that that 2% is a price worth paying for flexibility — what do others think of that?
• my wife is a basic rate tax payer and I could also contribute to her pension, which will have the advantage of the TFLS if nothing else.

Am I overlooking anything?

Triumph13

In case thresholds do go up again, it might be worthwhile building up enough to be sure of fully utilsing your 20% band between retirement and SPA. You still get the 2% gain if they don't.

Against that is the risk of tax rates going up by more than 2% of course...

ali_bear

It is possible that the LSA gets abolished, or raised to some unexpectedly high level, between now and your planned retirement date. And saving more into your pension is not necessarily a bad thing to be doing - OK it will be locked away until after retirement but it will be growing in a tax-free wrapper until you take it out.

What does it look like if you split your disposable income into three roughly equal parts, putting one into your pension, one into cash or ISA savings for the medium term, and the rest for enjoying life in the present?

Is there a minimum pension contribution for you to make to get an employer contribution?

kermchem

Congratulations to the OP as a USS member approaching retirement who has actually thought about the numbers and their consequences. I fear that not many USS members have seen their pensioner future.

Yes, if you revisit the USS modeller in 12 months then you will find that your salary, predicted pension and lump sum have risen, but all the tax allowances have stayed the same.

Yes, in 7 years a USS pension of £37K, plus state pension (triple locked?), plus the interest on that tax-free lump sum as it gets dripped into ISAs, will probably add up to higher rate tax.

Political discussion not allowed. You can only make plans on today's known facts. Tax allowances are not going to increase before June 2029, when a future government might or might not change allowances, triple lock, etc.

A USS DB pension of £37K comes as default with a lump sum of £111K so a lump sum of £250K implies a considerable sum from the Investment Builder / DC part of USS. This does not have to be taken as a lump sum, it can be taken as UFPLS (up to 4 times per year, part taxable possibly at 40%, and I viewed the paperwork as tedious), it can be transferred to a drawdown (SIPP etc) or used to buy an annuity, again both taxable probably at 40%. [I did take the IB/DC pot as a lump sum basically so I can ignore the annual threat to cut the tax free amount]

The fact that you have large IB/DC pot implies that you are either over the salary threshold (but your pension amount suggests not) or you are making voluntary contributions. You need to calculate if getting 42% Tax/NI releif on the way in versus at least some 40% tax on the way out for you, is better than adding to wife's pension with 20% relief on the way in and 20% tax on the way out. If you add 80% all of her earnings to her pension she will get more tax relief than the tax and NI she pays. This might be better than you getting 42% relief on the way in to pay 40% tax on the way out.

Where are your IB/DC contibutions invested? Have you chosen your own funds, or are they default funds and are they being "lifestyled"?

I took voluntary severance and USS retirement recently. My journey began with a realisation 2 years ago that my salary was X, paying into USS, paying NI, paying some tax at 40%, paying money each month into an ISA and a SIPP, leaving me with Y to spend each month. If you don't contribute to USS, pay no NI, only pay tax at 20% and don't save monthly into ISA or SIPP then my "number" is a lot less than X.

kempiejon

Wife's pension up to her maximum earning looks efficient as there'd be tax relief on personal allowance too might be worth doing the calculations.

Up to £30k in a defined contributions could perhaps be manipulated to 3 x small pot lump sum(s) and not test the LSA.

DRS1

If you are bumping up against the LSA then it can make sense to redirect money from your pension to an ISA. The ISA can also come in handy if there is likely to be a gap between when you stop work and when the pension starts.

Presumably you would be using an S&S ISA not a cash ISA? If a cash ISA then you probably want to pay in the max £20k while you still can.

michaels

https://forums.moneysavingexpert.com/discussion/6668088/close-to-lsa-and-likely-higher-rate-in-retirement-am-i-overlooking-anything

You seem to be missing the option of retiring (and taking your pension) earlier….

kermchem

The LSA is not the only limit on how much you can take tax-free. Anyone is limited to taking 25% of the "value" of your total pension. As USS is a hybrid DB/DC pension there is more flexibility as the limit is 25% of the total value of the pension. By HMRC rules the total value for this purpose is 20x your DB pension plus the 3 x DB pension lump sum, plus the IB/DC pot. In essence the maximum tax-free lump sum is 6.667 times your standard DB pension. For a pension of £37K, you are limited to £246K lump sum.

The full gory details can be found in https://forums.moneysavingexpert.com/discussion/6287299/uss-general-discussion/p1

kermchem

https://forums.moneysavingexpert.com/discussion/comment/81997160#Comment_81997160

If wife contributes to a pension up to her earnings (less contribution to employer DB pension), then yes, she can receive tax relief on the tax she paid, on her personal allowance and on the NI she paid.

If she then retires before state pension age and employer's pension is less than personal allowance, then she can take a tax-free 25%, plus some of the rest of the pension is also taxed at 0%.

guymo

Thanks everyone. There are some good points here and a couple of useful questions to think about.

I apppreciate the sugggestion to retire sooner but the plan is already to go at 60. A day earlier will cost about 10% of my pension because of the early retirement rules. If a voluntary severance scheme appears after I'm 55 then I might change plan.

We definitely can't afford to put 80% of my wife's earnings into her pension, at least not yet, but this is worth bearing in mind for the last year or two so thank you for those ideas. Was there something else that you meant by "tax relief on personal allowance" — is it just that you can end up getting tax relief on money that was not taxed in the first place by contributing heavily to the pension?

IB funds are in the USS Growth Fund, but I had forgotten that I am using the Lifestyle option which I probably don't want. I am very glad to have been reminded of that. As for where to invest the IB funds, I figure that because the majority of my needs will be met by the DB part plus state pension, the IB part can afford to be invested in riskier assets. Perhaps one of the other funds e.g. global equities would have done better. I find predicting the markets quite challenging though :) Would be interested to hear others' thoughts on these investment choices.

For what it's worth, to address a couple of other points made:

On the 6.66x thing, yes I know (but thank you!) I rounded the numbers a little in my first post. Of course the lump sum that the modeller calculates for me is 6.66 times the pension. The figures i wrote down in my notes were £37.4k and £249k. I did not intend to trick kermchem into going to the trouble of posting the details of this — sorry!

I'm over the salary threshold. I don't see how one could reach a DB pension of £37k without that, since the maximum accrual is just under £1k of DB per year and it has been quite a lot less for several years in recent history.

Like kermchem I am a bit shocked at how many of my colleagues don't understand or think about what the USS means for them. I put quite a lot of effort into talking to colleagues about this when we had the industrial dispute a few years ago, trying to explain how much was at stake. But I confess that the idea of retiring before NPA only occurred to me recently when I realised that the projected numbers if I work to 67 are much higher than necessary and noticed how many people fall ill or worse in their early 70s.

Overall I think the responses here confirm that I haven't missed anything major, which is reassuring, but there are a couple of little I hadn't thought about so thank you.

michaels

So is leaving the job before 60 that triggers the 10% loss or drawing the pension before then? If the latter then a bridge strategy is an option if affordable. (I retired at 55 and am using DC until I decide it is value to take my DB)