Defined benefit pension and redundancy

Wilson64

Hi

I just want to run my situation past the people on this forum, so as to get your feedback and comments.

I will be made redundant on 31 May, after 20 years with the same employer.
This means I will be getting the maximum statutory redundancy pay, plus three months pay in lieu of notice. This comes to a total amount of about £25k after tax.

I will also be taking my pension (I am nearly 60). Since this has come about through redundancy, I will be able to take the pension unreduced at its current level. I have about 27 years worth of a local government defined benefit pension.

In terms of the actual figures, I could take anything from a maximum lump sum of 65k with a reduced pension of £9,811, to a minimum lump sum of £12,899 with a maximum yearly pension of 14k. (The commutation factor is 1 x 12).

Having thought long and hard about this, my preferred option at the moment is a halfway house approach, in which I take 15% of the lump sum (39k) with an annual pension of 12k. This would seem to combine the best of both worlds, in which I get a reasonable lump sum but without eating into too much of my pension. And I would avoid paying any tax as it falls under the personal allowance tax threshold.

If I were to go for this option, adding the 39k lump sum to the redundancy payment of £25k makes a total of 64k. I then plan to pay off my mortgage (which is only 34K), thus leaving me mortgage free with 30k left, together with a 12k pension.

Is my reasoning sound? Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

p00hsticks

Wilson64 said:

Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

have you checked that you are on track for a full state pension ?
Check your State Pension forecast - GOV.UK (www.gov.uk)

if not (and many years presumably contracted out in the public sector may mean you need more that 35 NI years to reach it) then voluntarrily purchasing years going forward to take you up to or close to the maximum is well worth it...

Marcon

Wilson64 said:

Hi

I just want to run my situation past the people on this forum, so as to get your feedback and comments.

I will be made redundant on 31 May, after 20 years with the same employer.
This means I will be getting the maximum statutory redundancy pay, plus three months pay in lieu of notice. This comes to a total amount of about £25k after tax.

I will also be taking my pension (I am nearly 60). Since this has come about through redundancy, I will be able to take the pension unreduced at its current level. I have about 27 years worth of a local government defined benefit pension.

In terms of the actual figures, I could take anything from a maximum lump sum of 65k with a reduced pension of £9,811, to a minimum lump sum of £12,899 with a maximum yearly pension of 14k. (The commutation factor is 1 x 12).

Having thought long and hard about this, my preferred option at the moment is a halfway house approach, in which I take 15% of the lump sum (39k) with an annual pension of 12k. This would seem to combine the best of both worlds, in which I get a reasonable lump sum but without eating into too much of my pension. And I would avoid paying any tax as it falls under the personal allowance tax threshold.

If I were to go for this option, adding the 39k lump sum to the redundancy payment of £25k makes a total of 64k. I then plan to pay off my mortgage (which is only 34K), thus leaving me mortgage free with 30k left, together with a 12k pension.

Is my reasoning sound? Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

Without knowing any other details (?debts?spending habits?family commitments?health etc etc), it's hard to know if you've missed anything!

Otherwise looks sensible - obviously you'll start falling into taxable territory when your state pension kicks in, but I'm sure you've considered that.

Pat38493

Wilson64 said:

Hi

I just want to run my situation past the people on this forum, so as to get your feedback and comments.

I will be made redundant on 31 May, after 20 years with the same employer.
This means I will be getting the maximum statutory redundancy pay, plus three months pay in lieu of notice. This comes to a total amount of about £25k after tax.

I will also be taking my pension (I am nearly 60). Since this has come about through redundancy, I will be able to take the pension unreduced at its current level. I have about 27 years worth of a local government defined benefit pension.

In terms of the actual figures, I could take anything from a maximum lump sum of 65k with a reduced pension of £9,811, to a minimum lump sum of £12,899 with a maximum yearly pension of 14k. (The commutation factor is 1 x 12).

Having thought long and hard about this, my preferred option at the moment is a halfway house approach, in which I take 15% of the lump sum (39k) with an annual pension of 12k. This would seem to combine the best of both worlds, in which I get a reasonable lump sum but without eating into too much of my pension. And I would avoid paying any tax as it falls under the personal allowance tax threshold.

If I were to go for this option, adding the 39k lump sum to the redundancy payment of £25k makes a total of 64k. I then plan to pay off my mortgage (which is only 34K), thus leaving me mortgage free with 30k left, together with a 12k pension.

Is my reasoning sound? Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

First £30K of severance payments is normally tax free, so can you clarify what you mean by "after tax"?

Andy_L

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

Wilson64

p00hsticks said:

Wilson64 said:

Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

have you checked that you are on track for a full state pension ?


if not (and many years presumably contracted out in the public sector may mean you need more that 35 NI years to reach it) then voluntarrily purchasing years going forward to take you up to or close to the maximum is well worth it...

Yes, I've already checked this and am due to receive the full state pension.

Wilson64

Pat38493 said:

Wilson64 said:

Hi

I just want to run my situation past the people on this forum, so as to get your feedback and comments.

I will be made redundant on 31 May, after 20 years with the same employer.
This means I will be getting the maximum statutory redundancy pay, plus three months pay in lieu of notice. This comes to a total amount of about £25k after tax.

I will also be taking my pension (I am nearly 60). Since this has come about through redundancy, I will be able to take the pension unreduced at its current level. I have about 27 years worth of a local government defined benefit pension.

In terms of the actual figures, I could take anything from a maximum lump sum of 65k with a reduced pension of £9,811, to a minimum lump sum of £12,899 with a maximum yearly pension of 14k. (The commutation factor is 1 x 12).

Having thought long and hard about this, my preferred option at the moment is a halfway house approach, in which I take 15% of the lump sum (39k) with an annual pension of 12k. This would seem to combine the best of both worlds, in which I get a reasonable lump sum but without eating into too much of my pension. And I would avoid paying any tax as it falls under the personal allowance tax threshold.

If I were to go for this option, adding the 39k lump sum to the redundancy payment of £25k makes a total of 64k. I then plan to pay off my mortgage (which is only 34K), thus leaving me mortgage free with 30k left, together with a 12k pension.

Is my reasoning sound? Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

First £30K of severance payments is normally tax free, so can you clarify what you mean by "after tax"?

Yes, it's just the pay in lieu of notice that I was referring to as being taxable. The rest is not taxed.    

artyboy

Wilson64 said:

Pat38493 said:

Wilson64 said:

Hi

I just want to run my situation past the people on this forum, so as to get your feedback and comments.

I will be made redundant on 31 May, after 20 years with the same employer.
This means I will be getting the maximum statutory redundancy pay, plus three months pay in lieu of notice. This comes to a total amount of about £25k after tax.

I will also be taking my pension (I am nearly 60). Since this has come about through redundancy, I will be able to take the pension unreduced at its current level. I have about 27 years worth of a local government defined benefit pension.

In terms of the actual figures, I could take anything from a maximum lump sum of 65k with a reduced pension of £9,811, to a minimum lump sum of £12,899 with a maximum yearly pension of 14k. (The commutation factor is 1 x 12).

Having thought long and hard about this, my preferred option at the moment is a halfway house approach, in which I take 15% of the lump sum (39k) with an annual pension of 12k. This would seem to combine the best of both worlds, in which I get a reasonable lump sum but without eating into too much of my pension. And I would avoid paying any tax as it falls under the personal allowance tax threshold.

If I were to go for this option, adding the 39k lump sum to the redundancy payment of £25k makes a total of 64k. I then plan to pay off my mortgage (which is only 34K), thus leaving me mortgage free with 30k left, together with a 12k pension.

Is my reasoning sound? Have I missed anything? Am I in a good position? Grateful for any thoughts/comments etc

First £30K of severance payments is normally tax free, so can you clarify what you mean by "after tax"?

Yes, it's just the pay in lieu of notice that I was referring to as being taxable. The rest is not taxed.    

Is there any opportunity to put some/all of your PILON into your pension to increase the payout there? If you don't need that money now, it could be a worthwhile investment...

Albermarle

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

LGPS ( and some other public sector pensions) have these poor commutation rates. Apparently most still take the lump sum though. They can not resist the cash !

Wilson64

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

Thanks for your comment. Could you explain a bit more how I would be better off taking the higher pension and paying the mortgage off over its normal term? I'm paying £400.17 a month at a fixed rate of 1.78%, but this mortgage deal ends next April. I'll then revert to the SVR. I'm finding it hard to get my head round this...

Pat38493

Wilson64 said:

Andy_L said:

"(The commutation factor is 1 x 12)"

This is an appalling deal. 
If you crunch the numbers you are highly likely better off using the higher pension to pay the mortgage off over its normal term

Thanks for your comment. Could you explain a bit more how I would be better off taking the higher pension and paying the mortgage off over its normal term? I'm paying £400.17 a month at a fixed rate of 1.78%, but this mortgage deal ends next April. I'll then revert to the SVR. I'm finding it hard to get my head round this...

The commutation factor of 1 to 12 basically means you only have to live 12 years more before you are better off, which presumably is pretty likely for you?  Further, it is probably even less than 12 years once you take into account the inflation protection on the pension which is usually very good on public sector pension schemes i.e you get full uncapped increases so when inflation is 10% like in 2022, you get the full increase.  Generally public sector schemes have a 1:12 factor which is a lot worse than most other DB schemes where it's more like 20 or above.  This is presumably because public sector schemes don't have an obligation to make sure that you are being treated fairly when you take a lump sum because there is no pot of money sitting behind that has to be fairly managed for all members by trustees.  That said, I've heard that most public sector employees still take the lump sum anyway....  it's just that financially speaking it's not a good deal.

Regarding the mortgage - you don't have to stay on the SVR you could take out a new mortgage deal.  There is a reasonable chance that by next April interest rates will have started to come down and mortgage deals will be available at lower rates.  

You won't get a 1.78% rate, but if you get a rate less than 4%, you can probably beat that rate by investing the money instead.  So if there are good rates available next April you could take out maybe another 2 year fix?  Fundamentally if your investment return exceeds your mortgage rate, then in theory you are better off by not paying off the mortgage.  On the other hand, there is also the psychological comfort of feeling mortgage free, which some people see as more important than the pure math of the finance side.

How long does your mortgage have left to run?

That's the simple explanation - in reality it may be a bit more complex because you may or may not pay more or less tax by using the different scenarios and this could swing it the other way - e.g. if the annual mortgage payments pushed you into the next tax bracket the extra tax might cancel out whatever you gain on returns.

It's always a bit of a gamble though because you could end up with a negative year on investments, but on average you would be better off over longer periods.