Redundancy into pension confusion

MrPearl

Hi all,
I've just joined the site and need some assistance please. This week I'm about to have my redundancy confirmed and I know what I want to do with my payout, but I'm not sure if I can do it. I have seen an IFA, however, the cost for telling me the answer to my question seemed on the very high side and along with scaremongering such as calling it a "complex query" and "the consequences of getting this wrong are severe" this has made me a little nervous to say the least.

I am extremely lucky that I have a good payout and my situation and figures are as follows. I will be receiving a redundancy payment of 80k with a PILON & PILOB of around 14k. Total 94k. I know that my first 30k redundancy is tax free and that the other 50k redundancy is taxable along with the 14k PILOB/N.

The portion that I'm interested in is the 50k taxable redundancy. I want to pay as much of this as I can into my pension. I'm late 40s and I know that if I do that, I can't get near it until I'm 55 and that's fine. My current employer will pay my redundancy into my pension gross and the pension company will accept it as I've already investigated this. The redundancy payment will be paid at the end of April and will be in the new tax year.

I know about the 40k per year pension contribution limit and I'm also aware of carry forward which I have plenty of unused contributions to use if necessary. My question is this, as I will be receiving approx 94k in April and everything above 30k is classed as income, can I put 40-50k of my taxable redundancy into my pension? I'm a 40% tax payer this tax year and I know that I'll be thrust into the 40% tax bracket from month 1 of the new tax year. I will hopefully get a new job in the next few months, but that might be as an IT contractor or permanent, I've not fully decided yet.

I'm hoping I've given enough information to allow someone to answer, but please let me know if you need any further information.

Thank you in advance.

kidmugsy

The redundancy money in excess of £30k counts as earnings that can be used to justify a pension contribution.

Your taxable earnings for 18/19 are going to be large: £64k + whatever you make in a new job. Therefore you might be wise to read up on the (potential) tapering of Annual Allowance. Be aware that it can make a huge difference whether you contribute to a personal pension or whether you have your employer contribute for you by salary sacrifice. The latter can prove an expensive blunder. I suggest you start here:
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/

Dox

MrPearl wrote: »

Hi all,
I've just joined the site and need some assistance please. This week I'm about to have my redundancy confirmed and I know what I want to do with my payout, but I'm not sure if I can do it. I have seen an IFA, however, the cost for telling me the answer to my question seemed on the very high side and along with scaremongering such as calling it a "complex query" and "the consequences of getting this wrong are severe" this has made me a little nervous to say the least.

Not really what you need to hear from an 'adviser', is it? Maybe time to try someone who has a rather more reassuring approach at a realistic cost. Although you may get helpful comments/links here, you have no comeback if they prove incorrect - so getting advice on a personal basis could be well worthwhile, but probably not from the person you refer to.

adspence

kidmugsy wrote: »

The redundancy money in excess of £30k counts as earnings that can be used to justify a pension contribution.

Your taxable earnings for 18/19 are going to be large: £64k + whatever you make in a new job. Therefore you might be wise to read up on the (potential) tapering of Annual Allowance. Be aware that it can make a huge difference whether you contribute to a personal pension or whether you have your employer contribute for you by salary sacrifice. The latter can prove an expensive blunder. I suggest you start here:
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/

My situation is similar as noted here so very interested in what you are saying about the portion of redundancy that is put into the pension being treated as taxable earnings - even though it is incurring no tax itself. That would effectively mean that all my ~£26K PILON would be subject to high rate tax (as I'm hoping to put 60-70K into the pension like OP), right? Which wasn't something I was expecting, but rereading PTM044100 makes it clear it is employment income. I guess it makes sense that it is similar to a very large salary sacrifice. Oh well, the PILON is going to be light of NI and 40% tax.

BTW, what is PILOB?

MrPearl

PILOB = Pay In Lieu Of Benefits. Different for each individual, but for myself it was the money that my company would normally contribute to my pension.

Linton

kidmugsy wrote: »

The redundancy money in excess of £30k counts as earnings that can be used to justify a pension contribution.

Your taxable earnings for 18/19 are going to be large: £64k + whatever you make in a new job. Therefore you might be wise to read up on the (potential) tapering of Annual Allowance. Be aware that it can make a huge difference whether you contribute to a personal pension or whether you have your employer contribute for you by salary sacrifice. The latter can prove an expensive blunder. I suggest you start here:
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/

Why would SS be an expensive blunder? With a suitably large "redundancy sacrifice" there wont be large extra-taxable earnings. In the circumstances you describe surely it is the personal pension contribution that could be an expensive blunder.

kidmugsy

Linton wrote: »

Why would SS be an expensive blunder? With a suitably large "redundancy sacrifice" there wont be large extra-taxable earnings. In the circumstances you describe surely it is the personal pension contribution that could be an expensive blunder.

Did you not understand the link? I thought he made it pretty clear.

zagfles

kidmugsy wrote: »

The redundancy money in excess of £30k counts as earnings that can be used to justify a pension contribution.

Your taxable earnings for 18/19 are going to be large: £64k + whatever you make in a new job. Therefore you might be wise to read up on the (potential) tapering of Annual Allowance. Be aware that it can make a huge difference whether you contribute to a personal pension or whether you have your employer contribute for you by salary sacrifice. The latter can prove an expensive blunder. I suggest you start here:
https://3652daysblog.wordpress.com/2018/03/05/pension-allowance-taper/

The OP isn't going to have "taxable earnings" of £64k + new job earnings if he sal sacs £50k into his pension. He would have "adjusted income" of £64k plus other income. Unless his other income (inc pension conts etc) in the tax year is over £86k he doesn't need to worry about annual allowance tapering.

zagfles

MrPearl wrote: »

Hi all,
I've just joined the site and need some assistance please. This week I'm about to have my redundancy confirmed and I know what I want to do with my payout, but I'm not sure if I can do it. I have seen an IFA, however, the cost for telling me the answer to my question seemed on the very high side and along with scaremongering such as calling it a "complex query" and "the consequences of getting this wrong are severe" this has made me a little nervous to say the least.

It's not a complex query. Any IFA that says it's complex isn't worth bothering with - it should be straighforwards to any decent IFA.

You might even get free guidance on this from the TPAS: https://www.pensionsadvisoryservice.org.uk

I am extremely lucky that I have a good payout and my situation and figures are as follows. I will be receiving a redundancy payment of 80k with a PILON & PILOB of around 14k. Total 94k. I know that my first 30k redundancy is tax free and that the other 50k redundancy is taxable along with the 14k PILOB/N.

The portion that I'm interested in is the 50k taxable redundancy. I want to pay as much of this as I can into my pension. I'm late 40s and I know that if I do that, I can't get near it until I'm 55 and that's fine. My current employer will pay my redundancy into my pension gross and the pension company will accept it as I've already investigated this. The redundancy payment will be paid at the end of April and will be in the new tax year.

I know about the 40k per year pension contribution limit and I'm also aware of carry forward which I have plenty of unused contributions to use if necessary. My question is this, as I will be receiving approx 94k in April and everything above 30k is classed as income, can I put 40-50k of my taxable redundancy into my pension?

Yes. Taxable redundancy counts as earnings, so can be put into a pension. Or you can salary sacrifice it, ie get your employer to pay it direct into your pension.

I'm a 40% tax payer this tax year and I know that I'll be thrust into the 40% tax bracket from month 1 of the new tax year. I will hopefully get a new job in the next few months, but that might be as an IT contractor or permanent, I've not fully decided yet.

I'm hoping I've given enough information to allow someone to answer, but please let me know if you need any further information.

Thank you in advance.

Note kidmugsy's warning about the tapered annual allowance, that might apply if your total taxable income plus all pension contributions made by you and your employer come to over £150k. You need to look into it further it that might apply.

MrPearl

The upshot looks to be that, yes I can put 50k into my pension by salary sacrafice using my 40k annual allowance and some carry forward amounts from previous years. I need to be careful of hitting the tapered allowance of 150k and with my figures, that would happen if I earned 86k between now and April 2019. I doubt that will happen and it would be a nice scenario to be concerned about if I got close to it.

Thanks all for the replies, it's appreciated.

Just in case anyone is interested, the IFA wanted £1,500 + VAT to answer my question. He didn't even know that redundancy over 30k + PILON etc is actually classed as earnings (and if he did, he certainly kept it from me) which is an absolute disgrace really. However, as soon as I saw him drive away in a very, very new flash and expensive car, I should have guessed that he wasn't going to be cheap, or indeed, correct.

zagfles

MrPearl wrote: »

The upshot looks to be that, yes I can put 50k into my pension by salary sacrafice using my 40k annual allowance and some carry forward amounts from previous years. I need to be careful of hitting the tapered allowance of 150k and with my figures, that would happen if I earned 86k between now and April 2019. I doubt that will happen and it would be a nice scenario to be concerned about if I got close to it.

Thanks all for the replies, it's appreciated.

Just in case anyone is interested, the IFA wanted £1,500 + VAT to answer my question. He didn't even know that redundancy over 30k + PILON etc is actually classed as earnings (and if he did, he certainly kept it from me) which is an absolute disgrace really. However, as soon as I saw him drive away in a very, very new flash and expensive car, I should have guessed that he wasn't going to be cheap, or indeed, correct.

It'd have taken him 30 secs to google an excellent article like this one intended for advisers:

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/member-contributions-tax-relief-and-annual-allowance/

Although while not defending the ridiculous charge, one thing to bear in mind is that with such heavy over-regulation of financial services, if someone mis-interpreted his advice and did something stupid, they might be able to sue him. Like with a lot of over-regulated services, part of the cost you pay is the high cost of compliance and paying for mistakes of others (both IFA and clients). Still, it seems to leave enough over for flash cars...

Personally I'd trust the collective opinion of boards like this over the individual opinion of one single person. Even if I couldn't sue them. Plus it's far cheaper.