Should I use redundancy payout to buy some additional pension?

Don't_Know_Joe

I'm due to receive a redundancy payout soon that'll firmly push me into the 40% tax bracket for 2016/17. So far this year, my employers+my pension contributions are not more than £7,000, so way below the threshold I believe. I was thinking of using some of the redundancy payout (say £5,000) to give my pension a much needed boost. I've read articles saying it can be quite tax-efficient as the £5,000 contribution is actually worth more after tax relief is added back. Having read other articles, if I did make a £5,000 lump sum additional pension contribution this tax year, am I right in thinking the pension provider claims 20% tax relief. But I will need to claim back the further 20% tax relief by contacting HMRC myself at the end of the tax year?

minty777

Is't redundacy payment tax free?

PensionTech

Is't redundacy payment tax free?

Only the first £30k.

if I did make a £5,000 lump sum additional pension contribution this tax year, am I right in thinking the pension provider claims 20% tax relief. But I will need to claim back the further 20% tax relief by contacting HMRC myself at the end of the tax year?

Yes, if the scheme operates relief at source - but if it's a net pay arrangement or salary sacrifice, you can get your employer to contribute it directly from your redundancy payment so you never pay tax on it in the first place and don't need to claim anything back.

Don't_Know_Joe

Sorry, I should have clarified. The £5k lump sum contribution I'm thinking of making is over and above the taxable element over £30k. My employer has said any additional pension contributions I may wish to make, will have to be done myself. They will not deduct it from my payout. I read, I could effectively "claw back" some tax, by making an additional pension contribution. So if I did choose to put a lump sum of £5k into my pension, would my pension pot benefit from the £5k lump sum + 20% tax relief the pension provider claims + another 20% I'd have to claim off HMRC by saying I've put an extra £5k into my pension this year?

xylophone

http://moneytothemasses.com/tax-advice/tax-mitigation-tax-advice/how-can-to-reduce-the-tax-on-a-redundancy-payment

The Annual Allowance for 16-17 is £40,000.

http://www.hmrc.gov.uk/tools/annualallowancelimit/

atush

I would put in a pension everything over 30K

Sambella

It depends how much it costs, to buy an additional £1k of pension income for life may cost you something like £16-22k .

I plan to do this too but am prepared to forgoe my entire redundancy payment although I think you have to keep any compulsory element of it if it is an enhanced package.

Whether redundancy comes calling remains to be seem. There will be redundancies at my place of work each year up to December 2019. My job may or may not be made redundant.

PensionTech

Sorry, I should have clarified. The £5k lump sum contribution I'm thinking of making is over and above the taxable element over £30k. My employer has said any additional pension contributions I may wish to make, will have to be done myself. They will not deduct it from my payout. I read, I could effectively "claw back" some tax, by making an additional pension contribution. So if I did choose to put a lump sum of £5k into my pension, would my pension pot benefit from the £5k lump sum + 20% tax relief the pension provider claims + another 20% I'd have to claim off HMRC by saying I've put an extra £5k into my pension this year?

Yes, I think so. You may want to double check that your scheme can accept a one-off payment made directly by you, and confirm that it would operate relief at source on it.

simonfitba

If the lump sum is paid direct from your employer into the pension, it won't be taxed so no further relief can be claimed.

If you get the lump sum first (so it'll be taxed) then you put that into the pension, you can claim the relief.

Best to do it the first way and avoid National Insurance.