Could/should I pay my redundancy into my pension?

boojon

Hi, I'm a newbie looking for pearls of wisdom from the forum


At long last, I am about to get the redundancy package my company promised a couple of years ago (department outsourced, I was retained to hold hands of new provider)


59yrs old, basic tax rate payer, my final salary scheme (NRD 60) was stopped and deferred about 7 years ago and ever since, I have paid into a Group Stakeholder scheme (NRD 65).


Between my final salary pension, my spouse's pension and other accumulated savings, we have plenty to look forward to, so I'm thinking about what I can leave to my children/grandchildren.


I am lucky enough that I won't need to touch the proceeds of the stakeholder scheme for my own use, so my thoughts are to transfer them into a SIPP and further contribute the £3600 allowable (inc. 20% tax relief) as a non-earner, each year.


Does anyone disagree that this is the most efficient way to grow this money, given that new legislation allows most/all of it to be passed on to my own family and not the taxman when I die?


If you are with me so far, then I was also thinking about boosting my stakeholder pot while I am still working, by either making a one-off contribution to the scheme (my pension provider says I can do this) or having my redundancy paid directly into it (if my company agrees), while I can still get the maximum pension tax relief.


Does this idea hold water?


Grateful for any input, particularly if there any holes in my logic, or you think there is a better way of making this spare cash work harder for the benefit of my children.

atush

It holds water if, A you have another job to go to, or B have enough savings to live on until age 60 when your DB pension kicks in.

Esp if C, your redundancy is taxed (ie over 30K).

And your stakeholder can be drawn from before age 65, in fact you can draw it now.

and it does make sense to take tax free sums and some redundancy to put int your S&S isas. These can be inherited by your spouse or gifted when you w ant. As a couple you have 30K allowance each tax year, so can shelter 60K in this next calendar year.

boojon

atush, A - I won't be working anymore, B - my spouse's DB pension is about to kick-in, along with a six figure lump sum, C - my redundancy won't be taxed (c.£10k)


Our thoughts are that if we put all of my redundancy into the pension scheme (and then move into a SIPP when it closes), the taxman will add relief; a one-off chance to get a decent chunk of money back from the government before we both become non-earners.


We have separate funds to take care of ISAs; what is your reference to 30k allowance?

boojon

One more thing; a potential timing issue


I am guessing that a tax-free redundancy payment is not classed as earnings in a tax-year, so if I was made redundant in April 2015, then I would only get tax relief on a contribution equivalent to my salary earned in the 2015-2016 tax year (April + 3mths notice paid = 4mths)


If that is the case, would I be best served by making a one-off contribution from my own savings before the 2014-2015 tax year ends, so that the contribution earns tax relief on my 12mths earnings for the year?

Dunnit

Another thing to remember is that you can give as much money away from income as you want if constrained by IHT.

atush

Yes I would try and use some of this years allowance.

and does your OH DB pension come with automatic LS of six figures or can some of it be 'reverse commuted' to make a larger annual pension or is she commuting some pension for a larger LS?

xylophone

You might wish to consider gifting lump sums to your children/grandchildren? (PET)

And has been pointed out above, you might wish to go down the regular gifts from income route.

Either of the above might enable a mortgage to be paid off more quickly, or payments to be made into your children's own pension plans, or fund education or fully fund JISAs etc.

https://www.gov.uk/inheritance-tax/overview

boojon

atush - lump sum is not automatic, but we haven't come across anyone who thinks it's a good idea to do anything but take the 25% tax free on offer (bird in the hand, you never know how long you'll live, etc.). The remaining 75% is mostly indexed-linked (there are some pre/post 1997 rules on this within the scheme), so we expect to be OK financially; and then we get a top-up from the state at 66.


Dunnit & xylophone - thanks for tips and the link, will take a look, but given that we already sub our children constantly in various ways, we want to explore SIPPS that we can invest in and manage ourselves and pass on to them as pensions when we're gone, so they can do the same for their kids in the future. If we gift now, 'chalk' will just buy a bigger house and 'cheese' will just stay on benefits.

atush

I would say what scheme she is in, mostly it is a bad idea to take the highest LS possible due to the commutation rate. Most are dire


Ie how much index linked pension does she have to give up for each extra pound of lump sum?

boojon

I believe that the commutation rate is approx. 11.5 (the lump sum divided by the difference between the full & reduced annual pension?).
Therefore, I think the full pension overtakes the reduced pension + lump sum around age 71, but doesn't take into consideration the money earned on the unspent lump sum during that period. At a modest rate of growth, the 'overtake' would move out to age 73-74.
Also, I guess that if the value of the whole pot equates to 4x the lump sum (25%) when the pension commences, then I calculate that spouse would be in pension credit (i.e. paid back the whole of the pot) by age 76 if taking the full pension and age 79 if taking the lump sum + reduced pension.
It's that 'bird in the hand' thing again, should anything bad happen, but worth mentioning that if I'm still around, I would continue to get 50% of the full pension in either scenario.

kidmugsy

boojon wrote: »

I believe that the commutation rate is approx. 11.5 (the lump sum divided by the difference between the full & reduced annual pension?).

11.5 is pretty poor.

boojon wrote: »

Therefore, I think the full pension overtakes the reduced pension + lump sum around age 71, but doesn't take into consideration the money earned on the unspent lump sum during that period.

Neither does it take into consideration inflation, nor the money that might be lost on the unspent lump sum.

If you want the lump sum because you have your eye on an expenditure, fair enough. To take it and then just sit on it seems pretty daft to me unless (i) her life expectancy is poor, or (ii) you think the pension scheme might be in trouble. Anyway, if it's a lot of money why not see an IFA to go through the options with you? For example, take max pension and pay into a life insurance policy that will pay into (say) a trust for children, grandchildren, widower, and so on?