Redundancy money

suemcgorrigan

I am 55 and have been made redundant. I have received £58,000 redundancy, £30 of which was tax free. I can afford to save around half of my redundancy money for a few years at least. Should I start a new pension Sipp to invest this half (around £30,000). I've been told that for every £100 I invest in a personal pension, the government will add £25. However, I will have already paid tax on this money and then when I take it from my pension, a few years down the line, I will pay tax on 75% of it again, which doesn't seem to make good sense. Can someone explain whether the pension idea is a good one or not, please.

Dazed_and_C0nfused

You don't always have to actually pay tax on the 75%.

Some people manage to take the income in a year(s) when they have spare Personal Allowance.

If you contribute £8,000 then the tax relief which gets added gives you a pension fund of £10,000.

If you take it all in one go then £2,500 is the TFLS and £7,500 is taxable.

Assuming 20% tax is due on the £7,500 then you are left with £6,000 plus the £2,500 TFLS.

So your original £8,000 has become £8,500.  A 6.25% return.

suemcgorrigan

Thanks - I think I understand that!

Albermarle

So a minimum 6.25% tax benefit compared to investing outside a pension .
Even when not working you still have your personal tax free allowance of £12500 , so if you had no or little other income you could take some of the taxable income from the pension without actually paying any tax on it . In this case the tax benefit will be significantly higher than 6.25%.
One important point is that money that goes into a pension is invested in funds within the pension. With a SIPP you will have to choose which investments from a large range . Some pensions are more designed for inexperienced investors with simpler/less choices.
You must already have a pension with your ex employer ? Depending on what type it is you may just be able to add to that instead of opening a new one .

suemcgorrigan

Thank you.  You’re right, I do have a works pension which I will probably need to take in April.  That will be just over 12,000 a year which will use up my tax free allowance.  I am not allowed to add to that pension by the way (I have asked).  Your explanation of the money which will be added if I put my redundancy money in a personal pension SIPP, has convinced me that it’s the sensible thing to do.  I’m thinking of using Vanguard.  Do they automatically add the government‘S 25% or do I have to apply for it?
Thanks

Dazed_and_C0nfused

No, the basic rate tax relief is added automatically.  

Some companies prefund it so it is added straight away others wait for it to come from HMRC then add it.

Either way you aren't involved in that part.

Albermarle

Your current pension looks like a final salary pension so in this way you are pretty lucky to have at least a  guaranteed income ( although not lucky to be made redundant of course )
If you had to buy an income of £12,000 pa , inflation linked at age 55 , it would cost around half a Million Pounds.
Amazing but true ! The inflation linking ( assuming it has it ) pushes up the value a lot.
Vanguard or other provider assume you are entitled to the tax relief and just add it automatically.
If in the next tax year you have no earned income , or low income, you can still make some pension contributions and get tax relief even if you have not actually paid any .

suemcgorrigan

Yes I feel extremely lucky.  Thanks for all the very helpful information.