Redundancy and Pension Contributions

safe_cracker

My understanding is that I can invest up to the limit of my salary (approx £44k) each tax year into my company pension. I am threatened with possible redundancy in August/September owing to company cutbacks and it will be difficult to find a new job in the area where I live. Thus, in case redundancy strikes, I would like to pay as much as possible into my pension so that it will hopefully benefit from growth in the years to come. I am therefore thinking of living on my savings for the time-being and paying the maximum amount of my salary into the company pension going forward. I am also thinking about making a lump sum contribution from my savings into my pension. If I was to be made redundant in August/September and if by then I had contributed more into the company pension (salary contribution + employer contribution + 20% tax relief + lump sum) than the total amount of my earnings so far this tax year, then what would happen in the event that I was unable to find another job before the next tax year starts? I will have contributed more than my earnings in the current tax year prior to redundancy (though total contributions will certainly be less than the annual threshold of £40k), so would I be penalised in any way by the tax-man? Any advice much appreciated thanks. :beer:

kidmugsy

How much redundancy pay will you be getting? Usually the first £30k is tax-free; the rest is treated as taxable earnings.

Unless you can harvest additional employer contributions, or avoid 40% income tax, or use salary sacrifice, I'd caution you against piling money into pensions at a stage in your life when you may need some capital to draw on. In particular, don't risk making contributions that exceed your earnings for the year. Keep your powder dry and contribute to pensions again when you can restart harvesting employer contributions, etc, etc.

atush

You can put in up to 40K per annum, in total across all pensions.


And you can (if you have been in your company scheme) claw back the last 3 years unused allowances so would probably be able to put in 44K.

zagfles

Assuming the annual allowance isn't an issue, ie you have enough from previous years to carry forwards, then the issue is the 100% of earnings limit for your contributions.

How does you company pension work, are contributions taken before tax or after? If they're taken before tax then this isn't an issue, but you won't get tax relief on anything which takes your taxable earnings below the personal allowance. So unlikely to be a good idea as it'll be taxable when drawing it but no tax relief when putting it in. Although it's possible you'd use up your allowance in your next job in which case overall you might get tax relief!

If they're taken after tax, then you will get tax relief on amounts which take your salary below the personal allowance, but the gross contributions shouldn't be more than your taxable income (which can include the taxable element of redundancy, PILON etc but NOT the tax free part).

safe_cracker

Thanks all. In answer to queries raised, in the event of redundancy the company unfortunately only pay the minimum government statutory payment, meaning that I would receive approx £3.5K for the 5 years that I have been with them. Zagfles, thanks and for the record my pension contributions are calculated before tax is taken. I should have earned more than 10.5K (which I believe to be the personal allowance) by the time that I may be made redundant, so I think I would qualify for tax relief. I may however decide to put much of my salary into the pension meaning that I'll perhaps not have taken home as much as £10.5 in my wage-packet as such. I'm not sure if that makes a difference or if it's just the total overall earnings that I've made this tax-year that is the over-riding factor? So, I guess my next query would be if I've earned more than £10.5k this tax-year but decide to direct most of it into my pension, I take it that I would still indeed qualify for tax-relief to be applied to my pension contributions?

Kidmugsy, thanks and for the record I started contributing to my pension rather late. Whilst I have just over £100k in it, at my age of 55 I realise that amount is not going to give me a great pension unless I pile in as much as I can. I also have about £150k in bank savings (earning low interest like everyone else!), so that is why I am additionally thinking of making a lump-sum payment of about £10k into the pension, as I feel that I have enough in savings to keep me going for a number of years even if I can't find another job for a while after possible redundancy, but I may not get the chance to contribute to a pension via salary for some time ahead in a worst-case scenario, hence my eagerness to top up the pension. Do you reckon that makes the 'strategy' that I'm thinking about more justifiable or would you still urge caution? (I don't have mortgage worries thankfully).

kidmugsy

I think your situation does make your strategy justifiable. If there's a chance that you may need to draw out of the pension during a spell of unemployment, you might as well fill it up now to the permitted extent.

But at least wait to see if the govt is minded to standardise tax relief at 30% instead of the current 20%/40%. The Budget is on July 8th.