Q - Making the most of VR pay via pension contribution for tax efficiency when 55 and retiring

itsmeagain

Background...  I'm 55, ready to retire, but got wind of a VR package (soon to be available - possibly £70k), DB pension worth £28kpa @ 55 and additionally use the company DC scheme (£85k) as an AVC (with no company contribution as I'm still an active DB member) - all full salary sacrifice. If you require more info - just ask...

I believe that if I take VR, I will get the 1st £30k tax free, and then £40k to be taxed in the normal way. So I have a few naïve ideas that I'd like the experts to put me right on and advise on any other opportunity that I have not considered (assuming it all happens early in coming tax year).

1. Will any of the payment count for NI/State pension 'stamp' purposes (even I don't work next tax year)?
2. Do you get the 12.5k personal allowance on top of the 30K tax free?
3. Can I put the taxable £40k into my DC pension, thus saving tax & NI, enabling me to withdraw more tax efficiently via normal drawdown rules?
4. Would I need to leave some of the £40k as NI/Taxable earnings to get my NI 'stamp'?
5. What is the min pay that I need to leave (that I don't put in pension) to get a years state pension contribution?
6. Anything that I've missed the plot on?

Thanks!

Dazed_and_C0nfused

1.  If will depend on exactly what the redundancy payment consists of.  
2.  Providing your adjusted net income is less than £100k yes.
3.  Do you mean sacrifice the £40k so your employer's pays more into your pension?  Or would you make a relief at source contribution to a SIPP/personal pension?
4.  Are you only going to get this payment in 2021:22?  No normal wages?  
5.  Over what period are you expecting to be paid (earnings not pension income) in 2021:22?
6.  Have you checked your State Pension forecast in detail to understand how many more years (if any) you will need to contribute to get to £175.20?

itsmeagain

Thanks for your response...
1. all I know is that they have previously enhanced VR depending on years of service to total 1 year salary (in my case).
2. well, I assume my net income could be 30K if i put the other 40k in pension + around £5.5k for every month I work (which I would also pay pension on). I have some roll back left from the last 3 years, so would not exceed the 40K limit.
3. our pension is taken out of gross pay before tax & NI, to give a 'pensionable gross pay'. We then pay tax/NI on that pay. The employer pays no contribution to my DC pension because I have a DB pension. I use the DC as an additional contribution instead of a SIPP, so I get the Tax/NI benefit without needing to claim the 40% tax relief separately.
4. Depending on the date it occurs, I may get a month normal Salary in April before VR in May.
5. Ideally only 1 month pay in April, followed by VR in May (all depends if/when they let me go).
6. My state pensions is 4 years short @ £155, (probably on 3 years come April). If I get a stamp from the April pay & May VR, then I'll be only 2 years short of the full £175.

Dazed_and_C0nfused

1.  https://www.litrg.org.uk/tax-guides/employment/what-tax-do-i-pay-redundancy-payments

2.  You've lost me here.  Where is this £30k coming from?

3.  That sounds like salary sacrifice. Which means you don't contribute to the pension, you are agreeing to a lower salary in return for your employer contributing to the pension.  If you are correct how has your employer avoided auto-enrolment legislation?

5.  This should help,
https://www.thisismoney.co.uk/money/pensions/article-7873583/How-qualifying-years-state-pension-worked-out.html

6.  Making up the final two or three years is a priority as the return on the cost is hard to beat anywhere else.  Usually paid back after about 4 years even if tax is due on the State Pension 

itsmeagain

Thanks - I'll look at the links you sent.
1. I did already find that link but it didn't seem to answer my question wrt pension interaction.
2. If I get 70k VR and put 40K in pension, then my net & gross income would be the 30K tax free part of VR.
3. I'm not sure how to answer your auto enrolment question. Is it because I'm in the DB scheme? I just know that I pay 11% DB and 50% extra voluntary DC. They effectively contribute to my DB so don't need to contribute to my DC else it would be double company contribution. My taxable income = Gross income - DB & DC contribution. My contributions bring me well under the 40% tax band but obviously with tax & NI benefits, it seems worthwhile as I'll only pay 15% tax (25% tax free) when I take the DC/SIPP part of my pension.

So, in principle, is putting my VR through my DC pension more efficient than taking it as earnings or have I missed something?

AlanP_2

I just know that I pay 11% DB and 50% extra voluntary DC. They effectively contribute to my DB so don't need to contribute to my DC else it would be double company contribution. My taxable income = Gross income - DB & DC contribution. My contributions bring me well under the 40% tax band but obviously with tax & NI benefits, it seems worthwhile as I'll only pay 15% tax (25% tax free) when I take the DC/SIPP part of my pension.

This doesn't sound like Salary Sacrifice to me?

The tax will be saved but I'm not convinced the NI is.

njm123

1 - NI will get a "Stamp" for the months(*) you are paid in assuming you are paid enough to pay NI in that month (1/12 annual allowance).   
If you finished in March, you'd get a stamp for April if your redundancy was paid  in April.  If as you suggest you finish the end of April and get the final pay and redundancy  in May you should get NI stamps for April and May.

(*) or weeks if you are paid weekly.