Should I pay taxable redundancy cash into pension?

immy1

I will shortly receive a redundancy payment of around £42000.00.   My employer does not give the option of transferring the taxable element of the redundancy payment into my pension.

At the moment I have a small pension pot of £11952.00 which was operated and paid into  by my employer but their contributions end on redundancy date so I need to decide what to do with this.

I don't know whether it would be best to pay the taxable element of redundancy into my pension and then withdraw a larger lump sum or just accept the tax on the redundancy payout.

I am 66 now and have other pensions to live on so my aim would be to take as much tax free cash in this year or next.  

Grateful for any advice provided.  Thanks

sheslookinhot

I understand that if you have no unearned income, the maximum you can add to a pension is £2,880.

immy1

Thanks. I've read that you can add up to £40,000. Just wondered if it's a sensible idea or is it better just to take the 20% hit on my redundancy pay and leave it at that.

shinytop

You can't contribute more than you earn in a tax year but the taxable part of your redundancy payment counts as earnings.  Have a look here.

https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/redundancy-payments-being-used-for-pension-contributions/

immy1

I've had a read of that and the tax part of my redundancy was £12059.68.    I am receiveing a pension of £303.00 from my employer and will also get the full state pension this year.  Based on this and considering I am now not  working it looks like I should be able to pay in to the pension.   The only thing I can't figure out is what amount to pay into the pension so that the pension company can claim the tax back for me. I want to keep the £30,000 and pay the taxable bit into the pension but the £12059.68 has already been taxed? 

immy1

Message for Scrounger.  I tried to reply to you on the link but it is missing. If you see this message just to say a big thank you from me.

Best Regards

Scrounger

Sorry immy1, I was having some problems earlier with formatting.

£9,647.74 into pension will have £2,411.94 added by the pension provider.

Well worth doing as it gives a 6.25% (or higher) gain. 

Scrounger

immy1

Brilliant.  I understand what I need to do now.  Unfortunatley I will now have to wait for the tax office to refund me as my final pay slip shows that I have been partly  taxed at 20%  and then partly taxed at 40%.   As I  am only a basic rate taxpayer I will have to find out when they are going to adjust the tax to 20%.  

immy1

Hi again Scrounger can you just explain why I would get a 6.25% gain?  I thought it would be more than that and really for the complexity of doing it myself ( as ex-employer wouldn't),  I don't know if it will be worth it to me personally although I realise that something is better than nothing.  

Scrounger

The gain would be 6.25% (standard rate taxpayer) to 25% (non-taxpayer)

Example: £8k into pension would return £8k5 for a taxpayer or £10k if all taken tax free.
£8k x 0.0625 = £500 (gain)
£8k x 0.25  = £2000 (gain)

If using salary sacrifice the returns are higher: 25% to 47%  

Scrounger

immy1

Hi Scrounger. My last employer would'nt do it as salary sacrifice so I would have to send it to the pension provider myself.   I would probably be taking the pension next year anyway so will have a think as to whether it is going to be work for me.