Redundancy Age 50 Final Salary Pension Options

philng

I have the offer of VR in October and have been provided with the following options for my final salary pension:

1) Take full severance £88k and take immediate pension (scheme allows pension at age 50) £13547 pa index linked

2) Take full severance as above and defer pension until age 60 at £20714 (index linked)

3) Exchange severance in excess of £30k (£58k) and draw immediate pension £15127 again index linked.

I have scope to survive without drawing pension until age 60.

Just wondering what looks best value? By my calculation option 2 benefits from age 74 onwards but I may have miscalculated.

I intend also to check if I can draw the £30k tax free and place the excess £58k in my pension to draw back as alump sum when I am 60 thus hopefully avoiding 40% tax on this part-But I do have another £60k already held in my pension as a lump sum which I had already intended to do same with.

Any thoughts would be appreciated?

kidmugsy

philng wrote: »

I ... have been provided with the following options for my final salary pension:

1) Take full severance £88k and take immediate pension (scheme allows pension at age 50) £13547 pa index linked

2) Take full severance as above and defer pension until age 60 at £20714 (index linked)

3) Exchange severance in excess of £30k (£58k) and draw immediate pension £15127 again index linked.

Just wondering what looks best value? By my calculation option 2 benefits from age 74 onwards but I may have miscalculated.

Breakeven is at about age 79. Which is "no age at all". Are you married?

Exchanging the excess severance for extra pension looks rather expensive to me, but that may be because annuity tables don't usually show people of age 50.

philng wrote: »

I intend also to check if I can draw the £30k tax free and place the excess £58k in my pension to draw back as alump sum when I am 60 thus hopefully avoiding 40% tax on this part-But I do have another £60k already held in my pension as a lump sum which I had already intended to do same with.

Putting the £58k into a pension sounds fine as long as you do it in 2015-16 when you have plenty of earnings (it counts as earnings itself), and as long as you have plenty of Annual Allowance available from the preceding three tax years. Drawing it as a lump sum at 60 would be mad because you'd pay lots of higher rate income tax. Why not just draw it out between age 55 to 60, and pay only basic rate tax?


Anyway, what is your purpose in all this? Do you intend never to work again? Do you want to bridge the gap until your State Retirement Pension begins?

philng

Yes I am married.

Purpose is to be able to live off income from existing capital and then to draw full pension at 60 which is nra for scheme. Existing capital at conservative 3% I can earn in excess of 20k.

Other purpose is to get away from a job that has become frustrating and less enjoyable.

How do you work break even to be 79? Is there a calculator I can refer to?

philng

I am just checking but my scheme allows the tax free lump sum to be drawn from the AVC so I am hoping I can pay some or all of the £58k in to my pension and then draw back out as a tax free lump sum at 60.

I need to check as I already have £62k in AVCs so dont want to pay anymore in from the £58k than I can draw out as a tax free lump sum in total at age 60.

atush

Check how much your 25% tax free lump sum would be at its highest.

If you already have that amt in your pension AVC then put the 58K into a PP or sipp. AS this would be drawn from age 55 (the AVC would have to wait till scheme age if using it for the TFLS from your DB pension). If your current avc isn't large enough, then out in enough to come up to your TFLS and put the rest into a PP or sipp.

philng

So would I have to draw the excess over £30k less any extra I can pay in to my AVC as part of my redundancy payment and pay say 40% tax and THEN make payment to a PP or SIPP and claim the tax relief back off HMRC?

Or is there a way round this?

My key goal is to avoid paying 40% tax on as much of the excess over £30k as possible.

atush

Yes, it would be taxed. then your new provider will get BRT added back in, then you tell HMRC and they will refund the hrt amount, most likely by taking less each month from your employment.


It will be the same outcome as if the 40% had never been taken. Takes a little work but not that much really. And as you can draw it from age 55, rather than waiting is most likely a good idea. But you really have to work out how much you need in your AVC first.

AS that is a good deal, keeping your DB pension untouched but still getting a TFLS, but given you have to wait till scheme age, and if you put too much in you'd have to spend the rest on an annuity in many cases (as some AVCs cant be split ie used for the scheme TFLS and then use the rest as a PP)

philng

Thanks so I reckon I maybe able to add in an additional £20k to my works AVC that would leave £28k I would need to take as cash and pay tax upfront.

How cost effective is it to place this in say a SIPP and then drawdown from say age 55?

atush

It will be as tax efficient as any pension, as you are saving 40% tax and paying 0-BRT on drawdown.

How much tax you pay will depend on your taxable income at 55+. ie if your income is all from ISAs and you don have any unwrapped income, after your 25% TFLS you can take up to your PA w/o any tax at all. That will roughly be 11K going upwards as previously announced. If you have say 5K income, then you can take up 6K untaxed etc. Any pension taken over yoru PA would be subject to BRTax

philng

So I have been told today that if I pay the excess over £30k (£58K) this can only be used to enhance my overal pension which I intend to draw at age 60-This will mean ability to draw a higher lump sum but I can't directly draw the £58k as the lump at age 60 as I had previously thought.

I am able to use my AVC though for this purpose and can contribute further to the AVC prior to me leaving in October. This would mean making a contribution before receipt of the redundancy payment.

The redundancy payment over £30k would then be taxed as income & I am assuming I could then reclaim the tax paid via HMRC?

Alternative I think you are saying is to receive the full £88k redundancy and pay the tax on receipt & THEN open a SIPP or Pension for up to the £58k on which I can then claim tax relief with the redundancy payment classing as earned income in this tax year.

All seems complicated but does this sound right?

kidmugsy

philng wrote: »

... receive the full £88k redundancy and pay the tax on receipt & THEN open a SIPP or Pension for up to the £58k on which I can then claim tax relief with the redundancy payment classing as earned income in this tax year.

That's what I did.