Redundancy payment waiver : Defined Benefit Scheme

dealseeker

I will be receiving a redundancy payment when I leave my employer in the next few weeks. I have the option to waive some of my redundancy and put it into the final salary scheme that I am leaving.

I have around 22 years until normal retirement date (NRD).

Each £1,000 of redundancy payment waived will provide an extra :

• Member pension of £154.16 p.a. payable from NRD.
• Spouse pension of £102.78 pa payable on death after NRD.

• The pension will increase by 5% compound (or RPI if less) when in payment.
• Redundancy is tax free below £30,000.
• Pension contributions to stakeholder or personal pensions will reduce tax at my highest rate (40%).

Is the pension vs waiver of £1,000 in the defined benefit scheme better value than just taking redundancy and making an additional AVC, contribution to stakeholder (where contribution is eligible for reducing tax) and could be done some time in the future e.g. on starting new job.

I need to let HR know in the next few days. I thought about just taking the cash but if the pension return on this is good value then I would consider waiving some of the payment.

Initially was going to take the cash now but if the rate is good (taking into account the fact that there is no additional take relief on the contribution based on waiver of redundacy then I would put some into the pension.

Thoughts welcome. Does £154 p.a. for £1,000 waived sound good?
Is £1000 waived in pension equivalent to £1,000/60% = £1,667 in gross contributions that could go into a personal pension.

lisyloo

Does £154 p.a. for £1,000 waived sound good?

Do you have an IFA you can talk to or is there an advisor with your company pension.

Is £1000 waived in pension equivalent to £1,000/60% = £1,667 in gross contributions that could go into a personal pension

Be aware that we are only 5 months into the tax year.
Have you earnt enough during those 5 months to qualify for 40% tax reflief?

If you have then you must be earning a fortune and wealthy enough to pay an advisor :-)

Andy_L

Does the £154.16 increase over the next 22 years by RPI/5% or is it fixed?

EdInvestor

I'll leave others to comment on the figures and just point to 2 issues that I suggest you bear in mind.

1.How do you expect the future to treat the company you're leaving? Will it be strong and profitable in 20+ years time, easily able to pay your pension for the next 30 years? How well funded is its existing final salary scheme? How much money have you already got locked up in that scheme?

2.How confident are you that you won't find yourself unable to find a good job in your 50s and in need of a capital sum which can generate an income, or a pension fund which is flexible enough to be drawn on without penalty long before you originally planned to retire?The trouble with final salary pensions (and AVCs) is that they are often very inflexible.

Despite the tax attractions of pensions to those on higher rate,the wrapper is very illiquid. So is property. IMHO it is safer to keep a balance of assets, rather than to lock them all away.

dealseeker

lisyloo wrote:

Do you have an IFA you can talk to or is there an advisor with your company pension.



Be aware that we are only 5 months into the tax year.
Have you earnt enough during those 5 months to qualify for 40% tax reflief?

If you have then you must be earning a fortune and wealthy enough to pay an advisor :-)

Would only contribute into the personal pension arrangement if I were to be earing enough soon to maintain 40% tax status. So long as contributiuon made before end of tax year.

No advisor with pension scheme.

I don't have an IFA. Liklihood is they would recommend personal pension route.

dealseeker

Andy_L wrote:

Does the £154.16 increase over the next 22 years by RPI/5% or is it fixed?

Indexed by RPI or 5% . Whichever is lower.

dealseeker

EdInvestor wrote:

I'll leave others to comment on the figures and just point to 2 issues that I suggest you bear in mind.

1.How do you expect the future to treat the company you're leaving? Will it be strong and profitable in 20+ years time, easily able to pay your pension for the next 30 years? How well funded is its existing final salary scheme? How much money have you already got locked up in that scheme?

2.How confident are you that you won't find yourself unable to find a good job in your 50s and in need of a capital sum which can generate an income, or a pension fund which is flexible enough to be drawn on without penalty long before you originally planned to retire?The trouble with final salary pensions (and AVCs) is that they are often very inflexible.

Despite the tax attractions of pensions to those on higher rate,the wrapper is very illiquid. So is property. IMHO it is safer to keep a balance of assets, rather than to lock them all away.

1) 6 years service. They have a funding gap of c£760m. Increased by £40m this year alone.

2) Not confident. Big issue with older employees finding it harder to secure jobs. New legislation in October this year willmake it WORSE for older staff.

My feelings are to keep in flexible invetment e.g. ISA or unit trusts. Can then use / draw down if delay in finding suitable alternative job.

Thanks edInvestor. Agree with your points so will probably not use the defined benefit option.

dunstonh

I don't have an IFA. Liklihood is they would recommend personal pension route.

Better than a stakeholder.

dealseeker

dunstonh wrote:

Better than a stakeholder.

Sorry dunstonh. Why better than Stakeholder? Investment limits higher? I thought they had higher charges? Does A day make a difference now?

dunstonh

There is no difference in what you can do with a Personal Pension, SIPP or stakeholder pension. The only difference is that stakeholders have a defined charging process which may or may not be lower than the alternatives.

Stakeholders were brought in to reduce charges on pension contracts. They did that very well and charges came down to reflect that. However, you now have personal pensions with lower charges available and stakeholders have basically become "budget" plans with limited investment choice.

Most mainstream pension provider's personal pensions offer all the stakeholder funds on stakeholder charging as well as a load of externally managed funds at a slightly higher cost. There is little point picking a stakeholder that restricts your investment choice when all the stakeholder funds are available at stakeholder charging on the personal pension.

Indeed, you have situations now where, for example, the Norwich Union personal pension can have lower charges than the Norwich Union stakeholder. They are not alone.

Remember, what you are proposing here is an investment. Yet you appear to have hooked into what you percieve as the low cost option but havent given the investment side much thought. This is an investment. Your priority should be where you want the money invested and how that can be achieved. Charges come after that.

EdInvestor

dealseeker wrote:

My feelings are to keep in flexible invetment e.g. ISA or unit trusts. Can then use / draw down if delay in finding suitable alternative job.

This looks better to me too. Check the Savings and Investment forum for threads on investing lump sums - there's a recent one entitled "Investing 300k" and this one may also be helpful.

I would leave thoughts of pension investment until later - under the new rules annual tax relief limits have been replaced by a lifetime limit so you can take advantage of it any time, rather than lock up money now that you might need to access earlier.