Early Retirement & Redundancy Pay Out

Assume you live to age 84 (average male) - that gives 33 years.

£4,599 per year less of a pension = £151,767over 33 years. taxed at basic rate = £121,413.60.

Compared to the lump sum you would be £30,000 better off. But of course that assumes living for 33years, the money could be invested for growth etc.

That lump sum commutation rate is excellent, requiring only 5% return after inflation, say 8% before to match the foregone £4,599 in income. So long as you don't use it for something like paying off a mortgage (which only makes you the mortgage interest rate, not the 8% target) and will invest it then it looks like an excellent deal.

The first £30,000 of a redundancy payment is normally tax free so that's good and not something you need to address.

The remaining £31,680 is taxed as normal income. Here there's an opportunity. You can ask your employer to pay it into a personal pension (not a work pension) in your name and top it up with the NI that they save. You'll get the income tax back into the pension anyway. If they pay it in directly as salary sacrifice you also get your own NI going into the pension and maybe their employer NI as well.

You could then take 25% of the after tax money from that personal pension as a tax free lump sum and use the rest to invest and provide pension income for you. The lump sum would be something in the 10,500+ range with something like 31,500+ left in the pension pot to invest. + is because I ignored much of the potential NI gain.

At this point you'd have £91,540 works pension lump sum + £30,000 tax free redundancy + £10,500 redundancy personal pension lump sum = £132,000 lump to invest outside a pension and £31,500 in the personal pension invested. That's £163,500 total and it's reasonable to expect to take 6% growing with inflation as an income without capital loss over the long term, giving you a potential pre-tax income of £9,810 from those investments + £14,239 from the works pension = £24,049 reasonable target annual income before tax. No NI to pay on that, just income tax.

Now is a good time to be investing in general so there's potential to do a good deal better than that.

If you're not already comfortable with selecting investments you should visit unbiased.co.uk and find a local IFA to help you to select a range of investments. Expect something around 15+ individual funds to be used and if you're advised to use 3-5 go and find someone better instead.

You should expect any IFA to advise you to first start to put the lump sums into your stocks and shares ISA and that of your spouse, if any. That's 7200 this year plus 10,200 for later years, potentially for two people so in five to ten years depending on growth of investments the money should all be generating tax free income.

Now is quite a poor time to be buying an annuity so best to defer doing that for at least a few years. Your age also makes annuity purchase unattractive compared to investing.

An individual might pay significantly greater contributions as part of normal retirement planning and might simply fund those contributions from the sale of investments, deductions from salary, salary sacrifice, redundancy sacrifice or from existing savings. A pension commencement lump sum might be an integral aspect to the increased contributions to the effect that one of the reasons for increasing contributions is to receive a larger lump sum. The recycling rule will not apply in these circumstances where the individual is not setting out to use the pension commencement lump sum as the means to make those increased contributions, whether in a direct or indirect way.

Here's a link to the overview of pension recycling. The examples are particularly useful.

There's no gain from using the commutation lump sum to make more pension contributions in this case, so there's no reason for pension recycling to be a factor. However, if that was considered for some reason:

1. An increase in pension contributions above past levels or 30% of a lump sum can be recycled without triggering the recycling rules, £27,464 plus typical contributions made in past years in this case.
2. The lifetime allowance is £1.75 million for 2009/10 and 1% of that must be recycled before the rules can apply, 17,500.

So in this case at least £27,464 plus the redundancy money plus pension contributions typically made in past years could be paid into a pension before even thinking about recycling.

The easiest way to contribute more if desired for some reason is to avoid preplanning it.

yelf wrote: »

Assume you live to age 84 (average male) - that gives 33 years.

£4,599 per year less of a pension = £151,767over 33 years. taxed at basic rate = £121,413.60.

Compared to the lump sum you would be £30,000 better off. But of course that assumes living for 33years, the money could be invested for growth etc.

Hi,

Just a small thought (I am a novice) Correct me if wrong.
90000 in savings account @ 5% APR = 4500 per annum so still 90 k left after 33 years and you still get 4.5 K per year.
Am I correct????

Shan