Redundancy into a pension

aphill24

Hi all, I'm about to be made redundant on the 25th September. I'm receiving a sum of money that I'd like to shield from paying as much tax as possible. I'm looking at putting as much money as I can into a sipp and don't need to access it for a few years. I'm 55 yrs old and along with my redundancy I will be paid a DB pension from the company hence not needing to drawdown the money I want to save tax on. My wife is a part time worker and doesn't pay tax so should I be using her tax allownce when I want to drawdown the pension eventually by putting the money in her name? She has a small pension built up but it's pro rata so wont be more than a few thousand a year when she can access it.
The money will be around 50k and as I have unused allowance of 60k for the past three years i could use carry forward to pay it into a pension where it will be uplifted by 20% and after a self assessment a further 20% for this tax year at least. My pension will be 17k next tax year.
Happy to supply more information if needed and really asking where can I invest the money for growth for around 5 years at least.

Dazed_and_C0nfused

It gets a 25% "uplift" not 20%.

Do you have sufficient pensionable earnings in this tax year to be able to make such a large contribution?  That needs to be considered before carry forward applies.

You don't get an extra 20% through Self Assessment.  Your basic rate tax band is increased which can mean you pay less 40/41% tax and more at 20/21% but only to the extent you have paid higher rate tax.

It isn't clear from your post if you will actually have sufficient taxable income in this tax year to benefit fully from higher rate tax relief.

OldBeanz

First thing I would be looking at is how much is taxable then if it is possible to top up your DB pension.
You state you do not need the money for 5 years is that a vague time or are you repaying a mortgage or loan.
As your wife does not pay tax and you will stop being a HRT payer then she can shift her marriage allowance to you in the next tax year.
What are the plans for her pension? Will she get the maximum when she hits her pension age - will you? You may need to pay some NI.
Presumably she will want to retire before state pension age - she can put all her salary into a pension which has the 25% uplift and she can draw £16.6kpa tax free so scope for loading a lot of money.

Albermarle

As you will have only worked for 6 months of this tax year , then to contribute £50K to your pension , you will have to be earning a salary of well over £100K pa to be able to do this .
The annual allowance carry forward only comes into play if you have sufficient taxable income in the current tax year to take advantage of it .

NoMore

Does a redundancy payoff not count as taxable income, I thought it did but everybody seems to be questioning it in this thread ?

ADA58

if the OP has 50K redundancy 20K will most likely to be taxable income, so worth looking to get a tax break on that part, plus maybe anything over 12.5K from this years pay. 

I faced a similar issue and considered 

1. keep some cash from redundancy to pay "wage" until next April but also see point 2, and defer any DB pension as long as possible (check with Trustees if any uplift / reduction in penalty occurs for delaying) 
2. Place rest of redundancy in SIPP , and try and  gain as much tax relief as possible, and then take 25% tax free immediately to pay "wage" in point 1 possibly negating the need to take any cash from the redundancy to cover any costs this year 

Albermarle

ADA58 said:

if the OP has 50K redundancy 20K will most likely to be taxable income, so worth looking to get a tax break on that part, plus maybe anything over 12.5K from this years pay. 

I faced a similar issue and considered 

1. keep some cash from redundancy to pay "wage" until next April but also see point 2, and defer any DB pension as long as possible (check with Trustees if any uplift / reduction in penalty occurs for delaying) 
2. Place rest of redundancy in SIPP , and try and  gain as much tax relief as possible, and then take 25% tax free immediately to pay "wage" in point 1 possibly negating the need to take any cash from the redundancy to cover any costs this year 

Yes you are right that the OP will be taxed on any redundancy payment over £30K , so anything over £30K can be added to earned income in this tax year to work out the maximum contribution to be made that can attract tax relief .
In this case he might well go over the annual allowance and then carry forward would start to apply , if he had any .

green_man

Yeh I was made redundant a few years ago. First 30k is tax free, I added the rest of the payout to my pension.

aphill24

Hi Sorry for the delay in replying:
My earnings up to September 25th will be £22k. my DB pension to next April will be £9k so £31k. I'm recieving a redundancy of £135k that is taxable apart from the first £30k so £22k +£9k + £105k = £136k in taxable pay for 2020-21 tax year.
I have the option to defer part of my redundancy into next tax year (please don't say I can;t do this as I am allowed) 
To bring me under the earnings limit of £100k for this tax year I will be deferring £36k. I hope this answers the queries above?
I have unused pension allowance from the past 3 years of approx £20k each year so should have scope to put as much of my taxable redundancy into a personal pension to make use of my unused £40k allowance as I have earned over this amount each year.
I don't really want to confuse my situation regarding paying into my wifes pension  but I was thinking if I did I could draw it down in lumps of £12500 in future years does this sound a better way to save tax?

aphill24

OldBeanz said:

First thing I would be looking at is how much is taxable then if it is possible to top up your DB pension.
No I can't top up my DB pension
You state you do not need the money for 5 years is that a vague time or are you repaying a mortgage or loan.
Yes it's vague but I have no need for it as have other savings
As your wife does not pay tax and you will stop being a HRT payer then she can shift her marriage allowance to you in the next tax year.
What are the plans for her pension? Will she get the maximum when she hits her pension age - will you? You may need to pay some NI.
I need to contribute another 4 years my oh has full contributions
Presumably she will want to retire before state pension age - she can put all her salary into a pension which has the 25% uplift and she can draw £16.6kpa tax free so scope for loading a lot of money.

Dazed_and_C0nfused

To bring me under the earnings limit of £100k for this tax year I will be deferring £36k. I hope this answers the queries above?

It does, although don't forget to factor in other taxable income such as untaxed interest, however I think you seem to be under the impression that you would lose some of your Personal Allowance if your taxable income exceeded £100k.

You don't, you only lose your Personal Allowance if your adjusted net income, which takes into account your pension contributions, exceeds £100k.  With a large pension contribution of £40k+ then your adjusted net income is going to be less than £100k anyway.

I don't really want to confuse my situation regarding paying into my wifes pension  but I was thinking if I did I could draw it down in lumps of £12500 in future years does this sound a better way to save tax?

In the future possibly but she would only benefit from basic rate tax relief now and how do you intend contributing more than an absolute maximum of £12.5k gross into her pension?  

My wife is a part time worker and doesn't pay tax