Voluntary redundancy and retirement

onlyroz

My husband is considering applying for voluntary redundancy. He is 53 and has been advised that his payout could be around £100k. He would like to retire and has been told that he could do so immediately upon approval from the pensions board. His pension is a final salary scheme and there is currently around £300k in the "pot" which I think would give him a pension of around £15k a year if he retired now.


What would be the most tax efficient way to maximise his pension and to still obtain a decent lump sum now? I believe he can get £30k of the redundancy payout tax free - should he put all of the rest into his pension, and if he did how much would this likely increase his annual pension by? And once the money is in the pension how would this affect the 25% lump sum that he can draw out at 55?


Thanks.

xylophone

that he could do so immediately upon approval from the pensions board.

Does his scheme have a "protected pension age"? That is to say, a right for those who joined the scheme pre 6 April 2006 to draw the pension before age 55?

If so, he will draw the pension and have the PCLS option immediately he retires?

Or do you mean that he would stop work now, and leave the pension deferred until he reached age 55?

Would he be able to draw the pension without actuarial reduction?

http://moneytothemasses.com/tax-advice/tax-mitigation-tax-advice/how-can-to-reduce-the-tax-on-a-redundancy-payment may be worth a look but for £50,000 read £40,000.

https://www.gov.uk/tax-on-your-private-pension/overview

However, your husband needs advice tailored to his circumstances.

jamesd

Will there be any reduction from taking the pension now under redundancy compared to taking it at the normal retirement age of the pension scheme? Sometimes redundancy deals pay out the full final amount, other times it's reduced. If it isn't reduced, best to take it.

Whether to take a lump sum from the defined benefit final salary pension would depend on how much lump sum is paid for each Pound of lost income. Usually this is a poor or very poor deal but it does depend on the scheme and sometimes it's a better deal. No way to decide without knowing the numbers but the generic answer is don't take a lump sum, use it all for a higher pension. Some schemes have a fixed lump sum and give a very poor increase if that lump sum isn't taken so even this isn't certain and the actual numbers really need to be checked before deciding.

It is probably not possible to pay the extra money into his work pension to get higher income but if it is possible it's likely to be a poor deal. As usual this varies by scheme so that generic answer might not apply, only way to know for certain is to find out what it would buy.

The usual best deal with the extra redundancy money above the first £30k is to ask if the employer will pay it into a defined contribution or personal pension. This gets the tax relief automatically and saves the employee NI bill. some employers would also add some of the employer NI saving.

For some defined benefit pensions AVC money can be used to pay up to 25% of a tax free lump sum. If his is one of this type then it would be a good idea to pay the money into the work scheme up to the 25% level. Then he can get it out tax free and not suffer from the commutation rate of income to lump sum that's probably not good normally. Again, only way to know is to ask if this is available in this scheme, since it's not in all of them.

Assuming he does end up paying the money into a personal pension that is a good way to go because from age 55 he can start to take out the money. At age 53 now that's not far away so the initial £30k of the redundancy and 0% for purchases credit cards or savings can probably meet the income need until then. This way he gets that nice boost from the tax relief.

onlyroz

Thanks all - I don't know the answers to most of your questions. Where should we go for this tailored advice and what information will they need to know? Timescales are short and a decision needs to be made quickly about whether to go for this.

The hope is for full retirement, either to start drawing a pension now or to have enough to live off until he can retire at 55.

xylophone

I don't know the answers to most of your questions.

Your husband can't make an informed decision without information - in particular, although under 55, is he eligible to take an immediate pension?

It is vital to find out about any actuarial reduction there might be.

If his employers are content for him to leave immediately ( indeed facilitating early leaving), then it may be that they would be prepared to stump up for some independent financial advice or at least make a contribution?

http://www.thepfs.org/yourmoney/find-an-adviser/ may be worth a look.

If he cannot access the pension immediately, or if accessing it at age 55 would still mean actuarial reduction, it might be worth his while paying as much as possible of the redundancy lump sum into a SIPP and drawing down gradually until he reaches Scheme Normal Retirement Age.

Have you and your husband obtained New State Pension Statements?

As his starting amount is almost certain to be lower than full NSP ( effect of contracting out), he would probably wish to consider making voluntary contributions up to his SPA or up to the full amount, whichever came sooner.

https://www.gov.uk/new-state-pension/overview

mgdavid

onlyroz wrote: »

..... His pension is a final salary scheme and there is currently around £300k in the "pot" which I think would give him a pension of around £15k a year if he retired now.........

Final salary pensions don't have a 'pot'. They are siomply a promise from the employer to pay a pension based on the final salary and the number of years service. The Pension Scheme will have a Normal Retirement Age (65 is typical) and there is usually a reduction (penalty) for taking it early. This could be 5% per annum so unless some special arrangement is made retiring at 55 could mean losing half of it.
You need to obtain and understand a copy of the Scheme rules (from the pension administrators) and also any other documents he's received about the voluntary redundamcy deal.
Taking lump sums out of DB pensions is usually a bad idea, do you have a specific need to do so?

Do you have other sources of income?
Do you have debts (mortgage perhaps?).
Do you know how much income you need per annum to survive with a reasonable standard of living?

There are lots of options but the base info is needed to be able to work out which may be best.

xylophone

Final salary pensions don't have a 'pot'

.

I interpreted this as the value of the pension as the OP referred to the DB Scheme?

As you say, some more information is needed so that her husband can consider the options available to him.

Timescales are short and a decision needs to be made quickly about whether to go for this.

I do hope that he is not being put under any pressure to act without full information - one of these "Act now or you'll be too late" voluntary redundancy offers.

onlyroz

mgdavid wrote: »

Final salary pensions don't have a 'pot'. They are siomply a promise from the employer to pay a pension based on the final salary and the number of years service. The Pension Scheme will have a Normal Retirement Age (65 is typical) and there is usually a reduction (penalty) for taking it early. This could be 5% per annum so unless some special arrangement is made retiring at 55 could mean losing half of it.
You need to obtain and understand a copy of the Scheme rules (from the pension administrators) and also any other documents he's received about the voluntary redundamcy deal.
Taking lump sums out of DB pensions is usually a bad idea, do you have a specific need to do so?

Do you have other sources of income?
Do you have debts (mortgage perhaps?).
Do you know how much income you need per annum to survive with a reasonable standard of living?

There are lots of options but the base info is needed to be able to work out which may be best.

The last pension statement we have says that £300k is the current value - I know that this is not a traditional pension "pot". I will see if I can find the full terms. His HR department has sent off some questions on our behalf asking about what his expected pension would be.


As for other sources of income and debts - our main source of income will be my salary. I am a higher earner than him and also considerably younger. We do have a mortgage but I believe that in a few years I would be able to service this on my own. If necessary it might be possible to extend the term (currently 12 years) or move it over into my name.


We always planned for him to retire in a few years - however this redundancy offer is equivalent to nearly 3 years salary. He hates his job and so it seems to me that we should be jumping at this chance.

onlyroz

xylophone wrote: »

I do hope that he is not being put under any pressure to act without full information - one of these "Act now or you'll be too late" voluntary redundancy offers.

They are saying that the current redundancy offer is better than ones they might offer going forward - however considering that we were hoping he would only have to work another 2-3 years it seems like we would be foolish to turn down the opportunity.

mgdavid

xylophone wrote: »

.
I interpreted this as the value of the pension as the OP referred to the DB Scheme?.......

agreed it could be a CETV, but unless they were being less than scrupulous and are dangling a carrot hoping he'll take the money and run thus absolving them of a lifetime liability i don't really see why it's been mentioned by them at all?

If he put the redundancy into a SIPP he still couldn't draw down for a couple of years as he's only 53. He could of course keep the 30k taxfree redundancy and put the excess into a SIPP but that presupposes the 30k will last until 55 which is why I asked about how much they need to live on (the Number).

xylophone

If he put the redundancy into a SIPP he still couldn't draw down for a couple of years as he's only 53

Yes, that was why I was saying "as much as possible" - it would seem that £30,000 would be the equivalent of two years' pension (see OP's first post above).

£70,000 would count as relevant earnings, and while there is the £40,000 cap to consider, there may be some carry forward to use as described in first link in post 2 above. The tax relief would be worth having? He could then start drawing down at age 55.

Then there is the question of what actuarial reduction there may be for drawing the pension before Scheme NRA.

On top of all this though, there is the consideration that the OP's husband "hates his job" - he may feel that an actuarial reduction is a price worth paying.......?