Pay Redundancy Lump Sum into my Pension?

PeterJShearer

Apologies if this subject has been covered already - I have looked, but I couldn't see a thread that covered my query.

The story is that I was recently made redundant and am looking to find out what the rules are for paying some of the lump sum into my pension fund to maximise the tax relief.

I have/had a non-contributary company pension fund (with Standard Life) which will now be converted into a personal pension that I can make personal payments into (I haven't made any up until now).

I have received my Redundancy payout tax paid. I'm a 40 % tax payer, will be 55 in February and I'm expecting to get another job :-)

Can someone please advise the "rules of engagement"?.

Thanks in advance.

westy22

Subject to a £50,000 annual limit, you can pay in any amount into a pension up to your earnings (from employment) level in that tax year and get tax relief at your highest tax rate. There are rules preventing the recycling of pension tax-free lump sums back into a pension but this does not apply to tax-paid redundancy money.

In any case, how would HMRC know that the money you put into your pension was the same money you received in redundancy payment?

PeterJShearer

OK, thanks for the information. My follow up questions then are:

As a matter of interest, do the monthly payments the company made into the fund this year count towards the 50,000 limit?, or is the limit for personal payments only?.

and

How is the tax relief obtained?. Does the Pension Fund gross-up the payments or is it something I need to claim back?

Thanks in advance.

atush

It will take into acct any payments made this year by you or the company. Generally the fund does the gross up, but you may need to check as it isn't a 'normal' payment.

vax2002

how confident are you they wont go bump with the pension pot or that there wont be another government raid of your pension money ?
Balance this with the percentage of people who will live long enough to draw a pension and the investment looks kind of bleak.
Then on top, any pension credits you get will be reduced as well as any other benefit they put in place.
You could leave yourself worse off.

atush

Take the above advice with a pinch of salt as this poster doesn't beleive in pensions full stop.

Last big raid on personal pensions was by labour. So as we don't have a Lab govt now you should take it as read that the current govt wants people to save for their own retirement and not look to increase the benefits bill.

Your biggest worry is getting a new job. As you can't access any money you put in now and in 6 months you dont have a job. So look to how long your current cash savings will sustain you before you decide how much of your payment to put into pensions. Make sure this years ISAs as full too and any non mtg debt is paid off.

PeterJShearer

Thanks for that, I was intending on doing nothing until I had a new job anyway, apart from loading up to the Cash ISA limit and parking the rest in instant access savings accounts....

jamesd

PeterJShearer, if you can do it within the £50,000 limit consider the option of taking benefits from a defined contribution pension as soon as you reach 55, then using the ongoing income to pay money into another pension. You'll pay 40% income tax and get 40% tax relief but you'll be accumulating another 25% tax free lump sum so it helps your position if you don't need the capital. You can recycle the pension commencement lump sum as well but you need to follow the limits in the rules that limit how much can be recycled. Ask if you're considering this and someone will point you to the limits. This is an even better deal if you can do it with a salary sacrifice pension scheme because you also save the NI, making a tax profit on the deal as well as the new lump sum.

If you were a member of any pension scheme for any of the previous three tax years you had a £50k allowance for each of those years and can use any part of that allowance in this tax year. That's a three year window that continues to move forwards so long as the back allowance isn't used.

The limit includes company contributions.

Whether you need to claim back depends on how the money was paid. Was it a salary sacrifice scheme, where both the company and your money were paid to the pension direct before tax and NI were deducted? If yes you have nothing to declare and have already received your tax relief. If your own contributions were taken from pay after tax and NI you need to phone or write a letter telling HMRC how much you paid in. They will then arrange a refund via your personal allowance.

For money paid in after tax the pension company will add 25% to cover the 20% basic rate tax. You contacting HMRC will take care of the higher rate part.

Vax2002, the UK government has never raided money in pensions. Not even once. If you want to see what a real raid on pensions looks like, go and look at the recent history of Argentina which simply nationalised all private pensions.

What some people use for a bogus claim about that was an allowance against Advance Corporation Tax. In 1997 the allowance was eliminated within a pension. In 1999 Advance Corporation Tax itself was abolished. Which means that for a maximum of two years there was a tax without a reclaimable 10% allowance to offset it. Way past time to get over that. If you want something more recent to grumble about look at the changes to the GAD calculation introduced by the current government.

Going bump with a pension pot depends on what it's invested in. It's held in trust so the company managing it going bust won't cause any loss. Most people will live long enough to take a pension. In this case, that's about two months away because the poster will reach 55 in February.

More succinctly, kindly cut out the scaremongering. There are reasons not to use a pension but those aren't the ones you gave, except possibly pension credits, which is unlikely for a 40% tax payer and will vanish anyway if plans to introduce a state pension above benefit level happen.

PeterJShearer

Hi Jamesd et al,

Thanks for your full and informative reply(s), I'll be giving the points raised some serious consideration over Christmas.

Regards to all.

Peter.