maximizing tax relief on pension / redundancy

bio

I've looked for posts on 'maximizing tax relief on pension & redundancy' but cannot see this elsewhere, also note this is all new to me.

In a nutshell: I'm being made redundant (paid before Apr), am over 55yrs, retire in 2019 and of my lump sum, approx £40k will be taxed at 40%. Since I've no debt I was wondering if I could put this into AVCs and "if needed" access the fund prior to retirement. How do I maximize tax relief?

I'm in a Final Salary scheme and taking redundancy (leave end of Feb and I cannot buy extra FS years)
I'm 58 (59 this year) and retire in late 2019.
I will get approx 70k lump sum and understand 30k is tax free but rest taxed at 40%
(I'm just under the 40% bracket but this will take me over)
I intend to find employment asap.

I've no debts and wondered about tax free AVCs but what if I need the money prior to retirement? I understand its possible to access the AVC fund as 25% cash and use the rest to buy an annuity (maybe fixed for x years ie maximize cash prior to FS pension start)

I've been advised by FS scheme that I can pay all of the 40k (that would be taxed) as tax free AVCs but that I can only access the AVC fund benefits when I access the main FS scheme benefits, unless I transfer the AVC fun to an external arrangement. So this means starting a personal pension and I've read this could cost quite a bit, possibly matching the tax savings?

Fabius

Hi,

There is a lot here to go through but I think that the end result will be the same so I'm going to skip straight to it:

If you intend to find employment ASAP and your prospects are good then I'd use some of the £30k that you are taking to get some professional advice on how best to deal with the rest. It shouldn't cost much and most advisers will provide an initial consultation without obligation.

You'll be saving on advice costs by paying for it with tax-free income and if you arrange a pension through the adviser you can continue to have advice charges paid through the pension. Plus the right advice from a professional could save you a lot in tax and wasted time picking apart what you might be told here.

Clearly you need to judge the merits of using some of your lump sum during unemployment to fund advice, but I think generally the advice will provide you with the most tax efficient method, most suited to your circumstances, of getting your redundancy pay from your former employer.

kidmugsy

bio wrote: »

.
I will get approx 70k lump sum and understand 30k is tax free but rest taxed at 40%
... So this means starting a personal pension and I've read this could cost quite a bit, possibly matching the tax savings?

Starting a personal pension needn't cost much and certainly not remotely enough to cancel the tax savings.

I was in roughly your position. I opened a SIPP with Hargreaves Lansdown, one of several good providers often mentioned on this forum. All you do is send them a cheque for £40k x 0.8 = £32k. They claim back from the taxman £40k x 0.2 = £8k, so that (after a delay of a few weeks) you'll have £40k in your fund.

Meantime you sort out your tax position so that the taxman refunds you the £8k he will have overcharged you on tax, so your net cost is now £32k - £8k = £24k.

Meantime, you decide what to invest the money in and use their website or their phone service to give your instructions. It really is pretty simple and cheap.

If the need arises you can withdraw your Tax Free Lump Sum, and put the rest of your pot into "Income Withdrawal", taking an annual income from it. The terms for the latter become more attractive from 26th March, which would suit you since to avoid higher rate tax you'll want to start that income in the new tax year.

bio

Thank you ever so much kidmugsy,

Is there a time limit for SIPP start before losing ability to claim 2012 tax back?

Did you mean claim back 40% tax (x0.4) and not 20% in "£40k x 0.2=£8k"?
(Another approx £200 per anum and I'm in the 40%bracket)

Re taking 25% cash and remainder accessed as "annual income" - how soon can this become "cash", how short a time period can this be, 1 year?

atush

Of your 40% tax relief it comes in 2 ways.

Basic rate tax is claimed by the new pension company. Then, you call HMRC and tell them you put 40K into your pension, and they will either pay you or adjust your tax code to reclaim the extra tax relief. So, in the end you will get 40% relief.

AS far as Drawdown, you will be limited initially to the GAD rate per year in getting cash from the pension in capped DD(after the 25% LS) . But you should (if you find a job quickly) not need to do so.

Once you draw your Main FS pension, if your income from t his pension (and any other pension incl State pension) exceed 20K per annum you can go from Capped DD to flexible Drawdown and this would mean you can take any amt from the pension pot incl all of it in one year (which may not make sense from a tax point of view).

bio

Thanks atush,

I was going to ask the following (in < >) but then I had a Simpsons Doh! moment. I can put the taxable, lump sum, tax free into my company scheme as an AVC and transfer this out to create a SIPP if needed.
< I still need to know of any time limit on starting a SIPP to allow me to put in a tax free AVC lump sum. Do I need to do this: as part of my final payment from my company, before end of 2012 tax year, anytime - which seems unlikely >

I found a 'drawdown' calculator on the HL site and see I would get approx £1500 year. which is less that I was hoping for. Yes I have no intention of taking this out but wanted to understand if I needed cash, for whatever reason, then exactly what could I get? Never having looked at this before I assumed you would have a pension for X number of years (and buying an annuity would be the same i.e. buy X years) i.e. less years, the more cash you can withdrawal but I now see this is not the case and tables of annuity rates are used.

atush

you need to put the money into a pension environment (either AVC or SIPP) before the tax year ends in which you stop work. You get 50K in pension contribs OR up to your salary for the year, whichever is lower. So if you only make 20K in a year, you can only put 20K in.

Waiting until after the new tax year starts could mean a much lower salary so less could be put in.

If you dont' DD immediately , the find can gorw (and therefore produce more income). Alternatively, the income drawn thru DD can be invested in a pension itself.

kidmugsy

bio wrote: »

of my lump sum, approx £40k will be taxed at 40%.

A note of caution. You can usefully put up to £50k per tax year into a pension, but that includes any pension contributions already made in that year by you and by your employer AND the year's growth in the value of your final salary pension, but you can also carry forward some allowance from previous years in which you haven't fully used the £50k allowance.


May I invite some of the experts here to enlarge/improve on the business of (i) how the growth in an FS scheme is treated, and (ii) how the carry forward works?

thenudeone

The maximum "allowance" of £50k can be exceeded by using up any unused £50k "allowances" from the previous three pension scheme years.

BUT the total you contribute must still be within the current tax year's income. The carry forward of £50k allowance does not allow you to contribute more than your income.

So (assuming you haven't exceeded the £1.xm maximum pension pot size), the maximum you can contribute to a pension is:
the LOWER of
1) your income this year
and
2) £200k less your contributions made in the previous three pension years
http://www.hmrc.gov.uk/incometax/relief-pension.htm

bio

Wow thanks for all the great advice. I can put all of the taxable lump sum into AVCs. I hope all this will also be useful for others in my 'predicament'.

PaulCooper

Just going back to basics for a minute

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shouldn't you ask your employer if they can pay the redundancy lump sum either side of the tax year, if they were happy to do that, you wouldn't give away lots to the taxman, unless of course you walk into another reasonably paid job quite quickly (which of course I hope you do)
Paul