Redundancy Payment into Pension?

ecnirp98

Hi

I am in 30 day consultation with my current employer as my role has been identified as at risk as it is being outsourced oversees after working with them for 10 years. I have been notified I am likely to receive my 3 month Redundancy Notice on 21st March 2016, with 3 months notice leaving 21st June 2016. My company is offering an enhanced redundancy payment if I sign a settlement agreement, stating the dates above, I am about to get this reviewed by a solicitor before signing.


My redundancy payment is around £45,000. I am a 40% PAYE and I have been told that the first £30,000 is tax free. I have very little debt (on manageable interest free credit cards) and no mortgage as I own outright and my wife works, so I have been told I can pay anything above the £30,000 redundancy direct to my pension as like an AVC so I save on tax on the £15,000 above the tax free allowance.


Is this recommended? it sounds ok to me if I do not need access to the money above £30,000? I am 47 years old, so quite a few years away from receiving my pension, if I take the full £45,000 in redundancy, do I pay all taxes including NI on the £15,000 above the tax free amount? I fill in Self Assessment for my Tax return as we receive the Child Benefit Tax and I earn above the threshold, so I will need to declare whatever my decision is.


Thanks for any advice.

ratechaser

Exactly what I did with my last employer's settlement... If you can afford to do so and don't need the cash anytime soon, using it for additional pension contributions is a very tax efficient approach... Consequently I don't have a penny of annual allowance left for this or the past 3 tax years

Incidentally, you probably know this already, but if there is a PILON element to your £45k figure, that won't count as part of the 30k tax free allowance.

ecnirp98

ratechaser wrote: »

Exactly what I did with my last employer's settlement... If you can afford to do so and don't need the cash anytime soon, using it for additional pension contributions is a very tax efficient approach... Consequently I don't have a penny of annual allowance left for this or the past 3 tax years

Incidentally, you probably know this already, but if there is a PILON element to your £45k figure, that won't count as part of the 30k tax free allowance.

Thanks for the advice, I am in a good position where I have a good lump sum coming and savings, and no pressing debts, just the usual living bills, with a good income from my wife, so I can put the taxable redundancy money into my pension if that is the most tax efficient way of doing it.


There is no PILON, part of my settlement agreement is to do knowledge transfer to the outsourcer, so I have to work my 3 months notice as part of the settlement and handover ( I will be handing over the basics for my company, as they should have the same skills as me ;O), I asked for gardening leave but this was not available.

From what I have read, the annual allowance for pension contribution is £40,000, I presume that is total for my + employers contributions? so even adding the £15,000 I would be adding, I will be below the £40,000 threshold. My redundancy payment will be made in June, so that will be on the 2016 - 2017 Tax year, so if I do not get a job quickly, I will only have 3 months pension contributions for that year.


I will have to wait and see how the Tax rules change in the budget, as my payment will be after that.

ratechaser

OK, no PILON does simplify things a bit, and actually working a notice period can be beneficial if you have a decent benefits package as you'd get the benefit of them for another 3 months (in my case, I was getting about 3k a month benefits value so was very happy to work my notice!)

As far as timing of your payment, well frankly who knows what the rules will be after the budget, all I'm hearing is pessimism... But if you still had 15k of headroom in your pension allowance for the current tax year, or unused carryover from the past 3 years (and yes, that's 40k gross contributions between you and your employer, just remember that it's 40k from the 8th July 2015 because of the special provisions in the last budget)... then I'd be asking my employer if they could make that payment before the 5th April. At least that way you'll know you are going to get the tax efficiencies that currently exist.

ecnirp98

Thanks, my benefits package is pretty good (not as good as yours!!!), around £1000 a month, so I am happy to get it for another 3 months, my standard notice period was 3 months and that is common in my area of work, so any new employers are happy to wait 3 months as that is usual, I am just glad its 3 months notice as it means I can actively look for work and tell employers I am available end of June.


The redundancy payment is made 7 days after I complete my notice period in the payroll run, which is in the settlement agreement, that's the end of June, so there is no chance they will pay me any redundancy money before that date. They are using it as the carrot to make sure we stay and complete the handover to the offshore team (who haven't got a clue).

So I will have to see what the budget brings....


Now I've just got work out what to do with the Tax free 30K, I've got a Coventry 5 year fixed 2.4% ISA that recently closed for deposits, so I cannot add to that.

ratechaser

Well I suppose if you had a spare 15k right now, you could always put it in as a pension AVC this tax year to get the full benefit under current rules, and then take the redundancy as cash in June.

A fairly big 'if', I grant you!

As for what to do with the money, take a look at the savings and banking boards. Cash ISAs are not as bad as all that when you're a 40/45% taxpayer, but you'll still beat them if you wanted to play around with some of the current accounts and regular savers that are currently on the market. I've recently started playing at this game and it's definitely worth it IMO...

AnotherJoe

ratechaser wrote: »

Well I suppose if you had a spare 15k right now, you could always put it in as a pension AVC this tax year to get the full benefit under current rules, and then take the redundancy as cash in June.

A fairly big 'if', I grant you!
...

Not really Even a short term loan would be worth doing for this.

ecnirp98

But the idea is to put in the excess over the £30K tax free redundancy limit, to make it tax efficient.


If I was to put in £15K today as AVC's, I have already paid tax on that as PAYE and I would still be paying tax on the £15K above the redundancy Tax free limit when I receive it In June, or am I missing something in the Tax allowance here?

ratechaser

ecnirp98 wrote: »

But the idea is to put in the excess over the £30K tax free redundancy limit, to make it tax efficient.


If I was to put in £15K today as AVC's, I have already paid tax on that as PAYE and I would still be paying tax on the £15K above the redundancy Tax free limit when I receive it In June, or am I missing something in the Tax allowance here?

Yes, you're missing the fact that you can reclaim that tax on an amount you pay in as an AVC, subject to having the spare annual pension allowance to be able to do so. Basic rate tax relief will automatically be applied by the pension administrator, and you claim the higher/additional rate part through a tax return. Of course it means you wouldn't need to put in 15k of taxed income - assuming you are well into the 40% tax band with your earnings, 9k would ultimately gross up to a 15k pension contribution...

ecnirp98

ahh ok, I will look into that, sounds a good idea, thanks.

ecnirp98

It looks like the budget is not going to change the pension tax now according to the news, so I will pay the extra £15,000 over the £30,000 redundancy Tax Free limit into my pension in June.