USS pension tax-free lump sum

[petronius]

I am a deferred member of the Universities Superannuation Scheme (USS). I plan to take the pension in 2020 when I am 55.

I have a defined benefit pot (Income Builder) of £11,100 per year (maximum pension option), with a crystallised value of £222,000 (20 X annual pension)

I also have a defined contribution pot (Investment Builder) of £145,000

I thought I was entitled to a tax-free lump sum of 25% of my total pension (£222,000 + £145,000 = £367,000). This would amount to £91,750 tax-free.

I thought I would then be able to take the balance of my DC pension (£145,000 - £91,750 = £53,250) as a taxable sum (or leave it in the Investment Builder for later taxable withdrawals).

However, I am told by USS that this is not possible, for reasons I don't fully understand. Among the options offered to me is that I take approximately £82,000 tax-free while I convert the remaining part of my DC pot into an annual pension at an extortionate commutation rate of 47.08.

This would increase the crystallised value to a level where £82,000 is exactly 25% of the total pension, but the cost to me is having to buy the equivalent of a poor-value annuity.

Can anybody explain to me why I cannot take 25% of the total pension tax-free and the balance of my DC pot as a taxable sum?

[Alaric]

I am a deferred member of the Universities Superannuation Scheme (USS). I plan to take the pension in 2020 when I am 55.

I have a defined benefit pot (Income Builder) of £11,100 per year (maximum pension option), with a crystallised value of £222,000 (20 X annual pension)

Can anybody explain to me why I cannot take 25% of the total pension tax-free and the balance of my DC pot as a taxable sum?

£ 222,000 is just an arbitrary number for taxation purposes. The defined benefit part has a capital value of whatever they say it is for commutation purposes. Unless they offer flexible drawdown, you would likely have to transfer the DC component elsewhere to a SIPP to be able to take out the lot.

You perhaps need to ask whether the two sections are linked in terms of what you can do. If not, then treat each section separately,

[Kantwebefriends]

I am a deferred member of the Universities Superannuation Scheme (USS). I plan to take the pension in 2020 when I am 55.
I have a defined benefit pot (Income Builder) of £11,100 per year (maximum pension option), with a crystallised value of £222,000 (20 X annual pension)

Is that after the actuarial reduction for drawing early?

I also have a defined contribution pot (Investment Builder) of £145,000
I thought I was entitled to a tax-free lump sum of 25% of my total pension (£222,000 + £145,000 = £367,000). This would amount to £91,750 tax-free.

I thought I would then be able to take the balance of my DC pension (£145,000 - £91,750 = £53,250) as a taxable sum (or leave it in the Investment Builder for later taxable withdrawals).

That seems reasonable; it's probably what I would have assumed.

However, I am told by USS that this is not possible, for reasons I don't fully understand.

if you have exhausted the information on their website then I suggest you write them a letter asking for an explanation. If their reply is no use I suppose you might try to find an IFA familiar with USS. Have you any former colleagues who could point you towards a suitable IFA? (Indeed, do you have a former colleague who might be able to wangle any useful information out of one of the relevant trade unions?)

If that line proves fruitless consider this alternative, designed to leave as little money as possible under the management of USS. (Because they were badly run for a long time and, perhaps, you have little faith that they are any better run now.)

(i) Take the DB part, including max TFLS.
(ii) Transfer the DC part to a SIPP, or some other sort of personal pension, and manage it yourself.

[petronius]

Hi Alaric, the crystallised value is summed to the DB pot when it comes to calculate the 25% tax-free lump sum. Otherwise they would not be offering £82,000 tax-free (the total value of the DC being £145,000).

However, they want part of the DB pot converted to annual pension so they do not have to hand me any additional sum beyond the tax-free lump sum.

In this option, DC would grow to £12,300 per annum with a crystallsed value of £246,000.

Total value of pension would be £246,000 + £82,000 = £328,000

So tax-free lump sum = £328,000 x 0.25 = £82,000

My question is - what happens if I do not want to convert any of the DB pot into annual pension?

[petronius]

Is that after the actuarial reduction for drawing early?

Yes. If I take it at 65 (normal pension age) it will be approximately 17,00 pa.

If I delay the start of the pension, the annual pension will be increased and so will its crystallised value, that in turn would allow me to take more tax-free lump sum from the DC pot.

However, the actuarial reduction factors do not seem too unfair and I would like to take it at 55 if possible.

I have spoken with USS again and apparently they are going to send me a letter illustrating the scenario in which no part of the DC pot is converted into annual pension.

[swill453]

Hi Alaric, the crystallised value is summed to the DB pot when it comes to calculate the 25% tax-free lump sum. Otherwise they would not be offering £82,000 tax-free (the total value of the DC being £145,000).

However, they want part of the DB pot converted to annual pension so they do not have to hand me any additional sum beyond the tax-free lump sum.

In this option, DC would grow to £12,300 per annum with a crystallsed value of £246,000.

Total value of pension would be £246,000 + £82,000 = £328,000

So tax-free lump sum = £328,000 x 0.25 = £82,000

My question is - what happens if I do not want to convert any of the DB pot into annual pension?

I think you've got your DBs and DCs mixed up.

Scott.

[petronius]

Yes, sorry, I got DC and DB all mixed up! in my previous post. It should read:

Hi Alaric, the DB crystallised value is summed to the DC pot when it comes to calculate the 25% tax-free lump sum. Otherwise they would not be offering £82,000 tax-free (the total value of the DC being £145,000).

However, they want part of the DC pot converted to annual pension so they do not have to hand me any additional sum beyond the tax-free lump sum.

In this option, DB would grow to £12,300 per annum with a crystallsed value of £246,000.

Total value of pension would be £246,000 + £82,000 = £328,000

So tax-free lump sum = £328,000 x 0.25 = £82,000

My question is - what happens if I do not want to convert any of the DC pot into annual pension?