lump sum taking pension at 55

[petronius]

I am a deferred member of the USS (currently 53 y.o.). For sake of simplicity, I ignore inflation adjustments in the following.

My princely pension at 65 (normal pension age) is estimated to be £15k pa, plus a tax-free cash sum of £45k.

If I choose to take the pension at 55 there will be an actuarial reduction for the annual pension, that I understand to be around 37% according to current USS factors. So I would get around £9450 p.a. (63% of £15k).

My question is, what happens to the tax-free cash sum if I take the pension at 55?

Given that this is a one-off, I would hope to get the same amount I would get at 65 (i.e. £45k). From a logical point of view, it does not make sense that the lump sum is reduced to the same extent as the annual pension.

However, I am all too aware that logic and pension rules do not always go together. So does anybody know how the lump sum would be treated if I take the pension at 55?

[OLTB]

Hi petronius.

I believe the scheme rules state that the lump sum is a multiple of 3 x your annual USS pension (hence the £45k lump sum figure you quote for a £15k annual pension). On that basis, a pension of £9,450 would generate a lump sum of £28,350. There should be the flexibility to reduce the lump sum and increase pension if that is more useful for you.

Cheers OLTB.

[petronius]

Hi OLTB,

This is what I fear, but I was hoping that the lump sum would not be reduced, as, unlike the annual pension, taking it early does not change the total amount received during one's lifetime (considering inflation adjustments and apart from the possibility that one dies before they are 65).

[Whatsup]

That is certainly not how the NHS scheme works.

There is a table of the reductions for both the lump sum and the pension ( calculated at the normal retirement age) that reduce at differing % from the normal retirement age to the point that early retirement is taken.

In the old NHS scheme ( with a retirement age of 60) the pension reduction was roughly double that of the lump sum reduction.

Regards

Colin

[Alaric]

taking it early does not change the total amount received during one's lifetime

Financial institutions like pension funds have heard of compound interest and work on the premise that £ 100 today has a greater worth than £ 100 in ten years time.

[petronius]

taking it early does not change the total amount received during one's lifetime

Financial institutions like pension funds have heard of compound interest and work on the premise that £ 100 today has a greater worth than £ 100 in ten years time.

I get your point, but it seems that compound interest is not considered when it comes to actuarial reductions in annual pension - these seem to reflect mainly the number of years a pensioner is expected to be alive for (and therefore draw the annual pension).

If compound interest (at some realistic level) were included in the calculations, actuarial reductions would be much more severe than they are.

[Alaric]

If compound interest (at some realistic level) were included in the calculations, actuarial reductions would be much more severe than they are.

I think you will find that actuarial reductions take into account the time value of money.

[Alaric]

I am a deferred member of the USS (currently 53 y.o.). For sake of simplicity, I ignore inflation adjustments in the following.

I don't think you should. If you defer taking the pension and cash until 65, it's going to be revalued at perhaps 2% a year, so around 25% to 30% higher in money terms. If you take the cash early, you won't get that revaluation, so the value or otherwise in early retirement factors should take that into consideration.

There's another way to arbitrage with early retirement. If you are allowed to take a cash equivalent transfer value, at the cost of giving up guarantees, you might get much better value. There again it might be worse, depending on whether or how the designers of the early retirement factors took the transfer alternative into account.

[Chrysalis]

You may be interested to know that your ‘princely pension’ of 65 would cost in the region of £500k if you were to purchase a similar guaranteed lifetime income. I expect it represents pretty good value for what you paid for it.

Regarding your question about the lump sum, is the information not available on the scheme website? (I know most about the NHS scheme, and as a previous poster indicated, it’s straightforward to find out the early retirement reduction for the lump sum and the pension).

[petronius]

You may be interested to know that your ‘princely pension’ of 65 would cost in the region of £500k if you were to purchase a similar guaranteed lifetime income. I expect it represents pretty good value for what you paid for it.

Regarding your question about the lump sum, is the information not available on the scheme website? (I know most about the NHS scheme, and as a previous poster indicated, it’s straightforward to find out the early retirement reduction for the lump sum and the pension).

Yes, I agree it was good value, I did not mean to be critical of the USS. Having said this, I personally would not pay £500k for such a pension. I also do not expect the transfer value that the USS may offer me to be in this region, but if it is I will give it some serious consideration.

I have browsed their website but could not find this information. I also called the USS but did not get a clear answer on this.

[Chrysalis]

Are USS definitely still offering transfers out? I thought perhaps not given the issues around the pension scheme and the ongoing dispute with members.

[petronius]

Are USS definitely still offering transfers out? I thought perhaps not given the issues around the pension scheme and the ongoing dispute with members.

It would seem that they do:

https://www.uss.co.uk/ifas/ifas-home/wh ... ll-provide

[Alaric]

Are USS definitely still offering transfers out?

You may need to be cautious about accepting a transfer value. Depending on how you measure it, they may not have enough set aside to meet all their future outgoings. In those circumstances they are allowed to cut back on what they might offer to people wanting to leave early.

[monabri]

I'm pretty sure that you would not get £45k tax free lump sum if you left 10 years early and it would be reduced by the same factors. Maybe a letter to your pension advisor is required. I would definitely expect a reduction though.

[DrBunsenHoneydew]

I'm pretty sure that you would not get £45k tax free lump sum if you left 10 years early and it would be reduced by the same factors. Maybe a letter to your pension advisor is required. I would definitely expect a reduction though.

My NHS Scheme has these reduction factors for taking your pension and lump sum at age 55 instead of a normal pension age 65 of:
Pension 60.9% of normal age pension
Lump sum 72.9% of normal age lump sum
I'd imagine the USS pension will have essentially similar actuarial reductions.

[melonfool]

Have you puu the info into there:

https://www.ussbenefitmodeller.co.uk/benefit_conversion

I'm surprised you say the phone call didn't help, I always found them very helpful (I transferred out).

Try again maybe and hopefully get someone better. Test out the wording of the questions to ask on here first perhaps?

Mel

[Chrysalis]

I have to say, I tried out of curiosity to find the information on the website, and I can confirm that the information guides I found were frustratingly vague about the actuarial reduction factors. Very different from the NHS scheme where this information is very easy to find.

[Chrysalis]

But it surely should be a straightforward question to ask. I’d try to do it in writing rather than on the phone. ‘If I retire at 55, what reduction will be made to a) my pension and b) my PCLS?’

[petronius]

Hi Melonfool, would you be prepared to reveal a bit more about your transfer out from USS?

I would be interested in when you did this and what multiple of annual pension you got.

Thanks

[petronius]

The USS did give me some actuarial reduction factors a while ago (it took me an hour on the phone to extract this info).

For 10 years early retirement the RF is 63.1% for men and 64.3% for women.

For 5 years early retirement the RF is 78.5% for men and 79.3% for women.

I have the other values as well if anybody is interested - I think these RFs were established in 2016.