Excess Redundancy into Pension

kidmugsy

Julia1927 wrote: »

I am definately planning on paying as much of the £8.5k salary into a pension as soon as I start my new job.

For example does the following look ok?
Pay £26,800 directly from my redundancy into my dc pension.

This will be grossed up to £33,500 + £8,500 already in the pot = £42,000 now in DC pension.

We need to take this year by year. In 17/18 do you have any spare capital to contribute extra to your pension at end March? You won't get the tax-free £30k until the new tax year, I assume, so I'll further assume that you will want to wait for that to appear before you contribute any more. And I'll assume that you'd rather not borrow to make a 17/18 contribution. Shout if those assumptions are wrong.

In 18/19 we'll suppose that the £20k taxable redundancy pay is paid directly into your DC pension by your employer. There will be no income tax to pay on that as you never received it as income; and, of course, it won't get a tax rebate in the pension because it has avoided paying tax in the first place. So the gross earnings at your disposal are now £8,500 + £5,000 of back pay = £13,500. This total justifies your contributing up to £13,500 gross = £10,800 net. Of course you may decide to make at least part of that contribution late in the tax year (not least because you'd want to wait to see how much salary you actually do earn in 18/19).

So the max money in your pension pot (ignoring profits or losses on the investments) = £8,500 old money + £20,000 ex employer + up to £13,500 = up to 42k.

Meantime you need to live. Your taxable earnings are £13,500 gross with approx £11,500 tax-free because of your personal allowance. (You'll need your income tax position sorted out because you'll be overtaxed at first because of that £5k of back pay being interpreted by HMRC as your new monthly salary. That, legend has it, is best done by a phone call at 08:00 on a Saturday.) So, bar a small amount of NICs, you should have available about £13,500 - tax of £400 - pension net contribution of £10,800 = £2,300. That falls far short of your desired 17k. But you can take the missing £14,700 from your new £30k of capital (tax-exempt redundancy pay). So you're left with approx £15,300 of capital outside your pension. You can back that up with the 25% tax-free lump sum if necessary. (£42k/4 = £10.5k). Please check that lot for errors and typos.

In 19/20 you can now drawdown taxable money from the pension in the amount calculated to avoid income tax. We've been through the beef of that calculation in comment #17, with added gravy in comment #18. My only other proposal is that it might be wise each tax year to wait until after the Budget in December before you contribute to your pension because the Chancellor might announce something to make you change your mind.

Julia1927

Wow Kidmugsy,

I actually think I've got it! :rotfl:

I've sat here this evening with pen and paper writing up a year by year calculation. I will build a simple spreadsheet tomorrow to make sure I've got the numbers right. Wish me luck..... I will let you know how I get on! :laugh::laugh: Haha!

Hopefully I won't have to keep coming back and highlighting my clear lack of knowledge around pensions and tax!

Just on a seperate point re: my state pension. I have logged onto the Government gateway site to check my SP entitlement and it says I cannot improve my entitlement which is currently showing as £159.55 per week.

I would just like to say a huge thank you to you and the fellow board members for all of your help. :T:T:T