Can I use my redundancy to purchase an annuity? What is the tax implication?

J999

I am 59 years old and have just been told I am to be made redundant.
The company will be generous with the redundancy payment and as I am in a final salary pension scheme and over 55, I can retire with a reasonable pension and take a big lump sum payment from my pension. They have offered to take my redundancy payment (less the tax free £30000) into the pension scheme and pay me a slightly larger pension and slightly larger lump sum payment, effectively meaning that my redundancy payment will be 'tax free', but of course only a small proportion will be 'tax free', as I am only taking a small proportion of it back from the pension in the larger lump sum.
I have investigated the purchase of an annuity with my redundancy payment and it appears that if I take the maximum 25% of this sum, I increase my lump sum by around £3000 more than that offered by my company scheme with the redundancy payment and get a larger pension by around £1000. I guess I want to know if this is possible? i.e When I am made redundant, investing the redundancy into an annuity and then taking two lump sums, from the annuity and one from my company pension and then pension from the annuity and the company scheme without invoking the wrath of HMRC.
I appreciate any advice.

jamesd

An annuity doesn't pay out a lump sum. You could take the work lump sum and pay that into a pension then take a lump sum and buy an annuity with that pension pot. It's very unlikely that it would be in your interests to do this because taking the lump sum would mean a lower work pension and those are usually paid at a rate much higher than the annuity income that the same amount of money could buy.

If you did want to spend the £30,000 to buy an annuity it'd probably be a better idea to use a purchased life annuity instead of paying the money into a pension and taking a normal retirement annuity. The PLA usually offers better tax treatment, unless perhaps you're a 40% or 50% tax payer and able to get that level of tax relief on money going into a pension pot?

If you're reasonably comfortable with investments it'd probably be in your best interest to pay the tax free part of the redundancy lump sum into a stocks and shares ISA and pick investments within that. This would then pay out a tax free income. It'd take a few years to get all of the money into the ISA.

How much pension income do you have to give up for each Pound of lump sum? Usually to get a lump sum from a final salary pension the exchange rate of income for lump sum is a poor deal and it'd be a better idea to take a smaller or no lump sum and keep the higher income.

How much extra pension income and pension lump sum does putting the redundancy money into the final salary pension buy? How much lump sum is being spent to buy it? How does the exchange rate of lump sum for income in this calculation compare to the one in the previous paragraph?

CLAPTON

J999 wrote: »

I am 59 years old and have just been told I am to be made redundant.
The company will be generous with the redundancy payment and as I am in a final salary pension scheme and over 55, I can retire with a reasonable pension and take a big lump sum payment from my pension. They have offered to take my redundancy payment (less the tax free £30000) into the pension scheme and pay me a slightly larger pension and slightly larger lump sum payment, effectively meaning that my redundancy payment will be 'tax free', but of course only a small proportion will be 'tax free', as I am only taking a small proportion of it back from the pension in the larger lump sum.
I have investigated the purchase of an annuity with my redundancy payment and it appears that if I take the maximum 25% of this sum, I increase my lump sum by around £3000 more than that offered by my company scheme with the redundancy payment and get a larger pension by around £1000. I guess I want to know if this is possible? i.e When I am made redundant, investing the redundancy into an annuity and then taking two lump sums, from the annuity and one from my company pension and then pension from the annuity and the company scheme without invoking the wrath of HMRC.
I appreciate any advice.

maybe post up the actual figures

I'm a little surprised that you're buying a private annunity provides both a large lump sum and a higher annual pension.
Are they both indexed linked?