To augment or not

pompeyrich

I have £8250 in excess of the £30,000 tax free redundancy amount. I have the option to take the cash, taxed at 40% or augment the excess into the Company Pension Sceme. This will get me an extra £356 p.a. pension, payable from this October when, hopefully, I will reach 50.

As the £8250 will be £4950 after tax, augmentation seemed a good idea, however I spoke to an IFA who felt I would be better off taking the money straight away. I have already started another job so the money isn't desperately needed straight away.

I would be grateful of any advice or opinions and reasons as to the best option in my case, thanks very much in advance, Rich

dunstonh

8250 minus 40%= £4950.
investment at 5%p.a. = £247.50 p.a.

£356 pa with 40% deducted = £213.60p.a.

So, taking the lump sum is the best option.

pompeyrich

Thanks Dunstan, chances are the pension will be taxed at 22% as I have taken a lower paid job now and this year I will only hit 40% due to redundancy and an extra bonus the company paid. Also the 5% return you quoted would also be subject to tax, so it is close either way, also could I not take a tax free lump sum at 50, thus reducing my tax liability? or is that too good to be true? Thanks again.

dunstonh

If you put the £4950 into a stocks and shares ISA then 5% average is at the bottom end of expectation. 7-9% would be a more reasonable average. I just used 5% to err on side of caution. The 5% inside an ISA is tax free. Plus you have the capital later when you may need it rather than a small annual amount.

Another option is to not take the pension at 50 but leave it until later. If its a money purchase pension, then there is no point taking it out of a tax free environment to put it into a taxable one. Plus the pension income is based on when you commence it. Leaving it until a later age when it will be higher in value and of more benefit to you could be a better option.

pompeyrich

Thanks again Dunston, good point about investing the lump sum and still having access to the capital, my only concern there is that I will "blow" it if it's sitting there available. The pension pays out at 50 due to them making me redundant, it's a final salary scheme so no gain not taking it, an unusual but welcome bonus. Anyway will take your points on-board and decide over the weekend. Anyhow thanks so much for your sound advice and reasoning, truly appreciated. Regards Rich