Buying and Using a Pension Immediately

CumbrianJohn

I'm looking at taking a voluntary redundancy package that would pay about 15k over the tax free limit... and that would be taxed at 40%. I've been told though that I could use that money to pay into a pension, get the tax back, and as I'm over 60, immediately withdraw 25%

Is this right? Do I have to buy an annuity with the rest... and does anyone please have any advice on how I should go about doing this

I already have an employers pension that I would draw if I took redundancy

Grateful for any thoughts or advice

redbuzzard

Thoughts only.

Start a low cost SIPP with it (and perhaps any other part of your pay in the year of redundancy that is taxed at 40%).

Pay in 80% of that value, which will be topped up to 100% by HMG through the provider, and you can get the other 20% back as a tax rebate.

If you don't need that cash, leave it invested. When you are ready, put it into drawdown and take the 25%.

An annuity purchased with 75% of £16,000 will be worth two balloons and a goldfish. (Actually c. £300 a year with a 5 year guarantee and RPI increases).

E&OE.

jamesd

It's right.

You do not need to buy an annuity with the rest. You can use capped income drawdown instead. You can take anything from no income to the amount set by the GAD limit under capped drawdown. If your current provider doesn't allow this you cna just transfer the money to one that does.

kidmugsy

CumbrianJohn wrote: »

I'm looking at taking a voluntary redundancy package that would pay about 15k over the tax free limit... and that would be taxed at 40%. I've been told though that I could use that money to pay into a pension, get the tax back, and as I'm over 60, immediately withdraw 25%

Is this right? Do I have to buy an annuity with the rest... and does anyone please have any advice on how I should go about doing this

The way I did it was to open a SIPP (with one of the several good providers often discussed hereabouts) and bung in all the earnings and compensation exposed to 40% tax in the relevant tax year. (As redbuzzard says, you send in your cheque for 80% of the amount exposed to the 40% tax.) Bingo, let a few weeks pass for your provider to receive 20% back from HMRC and you can draw the 25% lump sum as soon as you want. (Though what's your hurry? If you don't need it imminently it might be better to leave it in its tax shelter. I might have done better by leaving mine for longer: oh well.) Meantime, get on with your own task of claiming back the other 20% from HMRC.

However, you have to do all this in the right tax year, and the end is nigh for this one. If you get your package in 2013-14 would it really be exposed to 40% tax in that year? If it's going to be exposed to only 20% tax then there's no need to go through this rigmarole, though you may choose to, to get the modest advantage of the tax free lump sum.

CumbrianJohn

Thank you everyone for such swift and helpful advice... I'm now off to look at some other threads to get an idea of who are the better SIPP providers... then just a matter of sussing out the mechanics

Good thought about leaving the money in sheltered too...

What a great community... thanks again so much everyone

CumbrianJohn

And good point about getting the right point in the tax year kidmugsy... not sure how much control I'll have over that, but certainly a point for negotiation and to inform how I handle the rest