Excess Redundancy into Pension

Julia1927

I am hoping some of you learned folk can give me a few pointers as I'm going round in circles with this!
I am about to be made redundant late March with a £50k redundancy payment due on next available pay date being 6th April (New tax year). I will be 62 years old a couple of days before. I have a deferred defined benefit pension with an NRD of 66 and 9 months. I also have a defined contribution pension with a relatively small sum of £8.5k .
My employer is happy for me to pay any excess redundancy into my DC pension. My salary has remained static over the last 4 years at circa £30k. I have a new job to start immediately however it is only paying approx £8.5k per year. (I have some opportunities in the pipeline to find a better paying job, but this may take a little while?).
I was planning on paying the excess £20k into my DC pension. Can I do this if my income in the 18/19 tax year is so low?
I am going to be approx £8.5k short of required income per year until State pension kicks in at 66 so was planning on using the £30k tax free redundancy to help fund my shortfall?
Can any of you fine people explain the process of paying my earned income (New job £8.5k) into a new pension thereby getting the tax relief? My thinking is that I can pay £8.5k*80=£6.8 into a new pension gaining approx £1.7k per year which would make up my shortfall from my redundancy pay. Of course I will need to take the 25% tax free lump sum from my DC pension at little earlier than April 2022.
I would really appreciate any pointers.
Thank you......

GunJack

NRD of 66+ sounds a bit odd, when's your state pension age?

zagfles

Julia1927 wrote: »

I am hoping some of you learned folk can give me a few pointers as I'm going round in circles with this!
I am about to be made redundant late March with a £50k redundancy payment due on next available pay date being 6th April (New tax year). I will be 62 years old a couple of days before. I have a deferred defined benefit pension with an NRD of 66 and 9 months. I also have a defined contribution pension with a relatively small sum of £8.5k .
My employer is happy for me to pay any excess redundancy into my DC pension. My salary has remained static over the last 4 years at circa £30k. I have a new job to start immediately however it is only paying approx £8.5k per year. (I have some opportunities in the pipeline to find a better paying job, but this may take a little while?).
I was planning on paying the excess £20k into my DC pension. Can I do this if my income in the 18/19 tax year is so low?

Yes. The £20k counts as income if it's paid to you. If your employer pays it direct then it doesn't count towards the earned income tax relief limit. So either way it's fine.

I am going to be approx £8.5k short of required income per year until State pension kicks in at 66 so was planning on using the £30k tax free redundancy to help fund my shortfall?
Can any of you fine people explain the process of paying my earned income (New job £8.5k) into a new pension thereby getting the tax relief? My thinking is that I can pay £8.5k*80=£6.8 into a new pension gaining approx £1.7k per year which would make up my shortfall from my redundancy pay. Of course I will need to take the 25% tax free lump sum from my DC pension at little earlier than April 2022.
I would really appreciate any pointers.
Thank you......

You've described it pretty well yourself! Just pay 80% of your earnings into a pension (SIPP, stakeholder or personal pension), the pension provider claims the 20% tax relief, and you retain the 20% you didn't pay in.

Julia1927

Thank you Zagfles. Very much appreciated!

Gunjack, sorry for the confusion. I will receive a full SP at 66. My Deferred DB pension is split into pre 2012 where I have built up an annual sum payable from 65 and post 2012 until scheme closure which is payable from 66 and 9 months.

atush

If the redundancy is paid Apr 6th, you are into a new tax year.

If your earnings are below your PA (as they will be unless you have other income at 8.5K) then you could take a bit more than 30K of redundancy and still be under your PA.

Julia1927

Thank you Atush. I am due to receive approx £5k made up of wages and accrued holidays so guessing around £13.5k income for the year. May I ask if you think it is worth my while paying the £1,600 above my PA (£13.500 - £11,850) into my DC pension so a total contibution of £21,600?

I will need an income of £17k for the next 4 years so should I do the above and use my redundancy pot as income whilst contributing my £8.5k salary to the DC pension and then when the redundancy money has run down, start drawing from the DC pension? Sorry, but this is where I am confused trying to work out the most cost effective way of providing my income. Any pointers would be great!

Dazed_and_confused

Isn't the point here though that you will actually have taxable income from employment of £33,500 in the next tax year (assuming you get paid for a full month at your new job at the end of April and don't manage to find the better paying job you referred to in your op?)

atush

Julia1927 wrote: »

Thank you Atush. I am due to receive approx £5k made up of wages and accrued holidays so guessing around £13.5k income for the year. May I ask if you think it is worth my while paying the £1,600 above my PA (£13.500 - £11,850) into my DC pension so a total contibution of £21,600?

I will need an income of £17k for the next 4 years so should I do the above and use my redundancy pot as income whilst contributing my £8.5k salary to the DC pension and then when the redundancy money has run down, start drawing from the DC pension? Sorry, but this is where I am confused trying to work out the most cost effective way of providing my income. Any pointers would be great!

Well I would def put the 1600 in, as to the rest- how long you live on redundncy, and when to draw- i suggest you make it tax based and draw as much of your pension as would take you up to the PA in following years.

kidmugsy

Julia1927 wrote: »

I was planning on paying the excess £20k into my DC pension. Can I do this if my income in the 18/19 tax year is so low?appreciate any pointers.

You can because the non-tax-exempt £20k itself counts as earnings. So as D&C said you could contribute up to £33,500 gross = £26,800 net. Whether you want to contribute that much is up to you. My feeling is that 18/19 may be your last chance to make a large pension contribution so you might want to take the chance. You can always wait until this time next year to make the decision.

By the way, £8,500 p.a. is (I think but do check) enough to get you National Insurance Contributions attributed to you, even though nothing, or next-to-nothing, in employee NICs should be subtracted from your pay (except, presumably in the week/month that the £5k of wages and accrued holidays arrives).

Julia1927 wrote: »

I am confused trying to work out the most cost effective way of providing my income. Any pointers would be great!

After 18/19 suppose you are left on the £8,500 p.a. earnings. Probably the best way to fund your cost of living is (i) to take enough taxable income from your DC pension to use up your Personal Allowance against income tax. That might be roughly (predicting the future a bit) £12,000 - £8,500 p.a. = £3500. Along with that you'd get £3500/3 as tax-free lump sum = £1,666.

(ii) Then you'd use your capital. If you expect £17k per annum after tax to live on then you'd be taking from capital £17k - £12k - £1,666 = £3,334 per annum. So your capital should last a good long time and you still have back-up funds in your DC pension.

UPDATE: correction below in comments #14 & 17.

Julia1927

Thank you all so, so much!

Having spent many hours trying to understand what / how I should approach my particular circumstances I can finally look forward to a good nights sleep tonight!

:T:j:)

Julia1927

Hi Kidmugsy,

Sorry to be a numpty. I thought I understood your reply but can you please clarify for me:

"Along with that you'd get £3500/3 as tax free lump sum = £1,666".
I'm sorry but I don't understand this?

Many thanks.