Advice on using redundancy money to top up pension pots - worth it?

What_time_is_it

Hi there.

My partner and I may both be taking voluntary redundancy at the end of this year. It will come with a pay out of around £30 for me, and around £20k for my partner.
Should we invest it straight into our pensions?

Here's the background:

We are both 47.
We were working towards retiring in our late 50s-60ish.
We are now thinking of taking a year or two of work and then returning at aged 50ish.
We have savings that we can access to cover us for the next few years, and we (probably) don't need to access the redundancy money.
We have paid off our mortgage and have no debts
We have no children
We both have a workplace pension (USS for me, and Legal and General for my partner)
Our pensions are at around £11k a year DB from NRA for me, £5k a year DB from NRA for my partner, plus DC pots of around £150k for me, and around £30k for my partner
We have additional savings locked away in bonds and ISAs totalling around £300k.

So, would putting the redundancy money straight into our DC pension pots be the best way to invest it? Is there a better alternative?

Thanks!

Marcon

What_time_is_it said:

Hi there.

My partner and I may both be taking voluntary redundancy at the end of this year. It will come with a pay out of around £30 for me, and around £20k for my partner.
Should we invest it straight into our pensions?

Here's the background:

We are both 47.
We were working towards retiring in our late 50s-60ish.
We are now thinking of taking a year or two of work and then returning at aged 50ish.
We have savings that we can access to cover us for the next few years, and we (probably) don't need to access the redundancy money.
We have paid off our mortgage and have no debts
We have no children
We both have a workplace pension (USS for me, and Legal and General for my partner)
Our pensions are at around £11k a year DB from NRA for me, £5k a year DB from NRA for my partner, plus DC pots of around £150k for me, and around £30k for my partner
We have additional savings locked away in bonds and ISAs totalling around £300k.

So, would putting the redundancy money straight into our DC pension pots be the best way to invest it? Is there a better alternative?

Thanks!

Presume you mean £30K...!

Without knowing your current earnings, it's hard to comment meaningfully. Your pension provision - especially your partner's - isn't that great, so topping up now could make a lot of sense, especially as you are the best part of 20 years away from your state pensions (have you checked your state pension forecast recently?).

How realistic is it to believe you'll be able to return to the workplace after a break of a year or two, particularly as you'll then be into 'older worker' territory - and decent jobs aren't always that easy to come by? If you are certain that you are readily employable, then the above plan looks reasonably sound - and enjoy the break! 

What_time_is_it

Thanks for the reply @Marcon . Yes £30k! Haha!

How sure are we that we would be employable? Not sure at all! It's a bit of a leap into the dark. But that decision is already taken. If we are offered the redundancy package we will take it. It seems very likely that our future work will be at a lower salary, but that's part of the trade off. Anyway, we've decided on that part. It's the "what to do with the money" aspect that the headscratcher now.

I'm currently on around £45k and my partner is on around £25k.
State pension forecasts both checked and looking pretty good as things stand. I need another 3 years contributions for the full amount, my partner another 6 years. Of course that could change in the future too, but that is out of our hands!

So, it's really a question of where best to invest the redundancy money.

What_time_is_it

Oh, and I should also add that the redundancy money will be tax and NI free, apart from a relatively small amount if my payout is over the £30k limit for tax free status.
So the actual amount being paid into either a pension pot, or a savings product (or something else?) would be pretty much the same at the point of paying in.

Albermarle

You can only add money to a pension and get tax relief, if you have enough earned income in this tax year.
Normally the first £30K of redundancy money is untaxed, and as far as I know does not count towards 'relevant earnings' regarding tax relief on pension contributions.
So you would have to calculate your salary from April until you stopped work, and then subtract pension contributions already made, to find out how much you can add to a pension and get tax relief.

The actual source of the contributions- redundancy money, savings etc is not relevant, but you need enough earned income to claim/get the tax relief.

If next tax year you do not work at all, the maximum you can add to a pension and get tax relief is £2880 and £720 tax relief will be added.

For you I am not sure if the USS scheme will allow extra contributions, and so in that case it would have to be to your DC pot.

What_time_is_it

Thanks @albermarle
Yes, it would have be DC for both of us. 

Regarding the annual contributions max - Can we contribute more than our annual earnings? And then just not get the tax relief on the value above our annual earnings? Or is this an absolute max on how much we can contribute in a single tax year full stop?

For info, contributions can be made via salary sacrifice for both of us. If that makes a difference?

Albermarle

Regarding the annual contributions max - Can we contribute more than our annual earnings? And then just not get the tax relief on the value above our annual earnings? Or is this an absolute max on how much we can contribute in a single tax year full stop?

In theory you can contribute more and not get tax relief . However there are very few instances where this would be a wise thing to do. Pensions are taxed on withdrawal, so if you get no tax relief on the way in then you are losing out. Much better to put that money in another investment vehicle, like a stocks and shares ISA, or general investment account ( or in a savings account maybe) where no tax is payable on withdrawal.

Also in practice most pension providers are not set up to accept contributions without adding tax relief, so would be difficult to do even if you wanted to .

For info, contributions can be made via salary sacrifice for both of us. If that makes a difference?

From a tax relief point of view it makes no difference, although it keeps it simple. However you get a NI saving with salary sacrifice, so normally it is the preferred way if the employer offers it.

El_Torro

If you want you can add money to a pension and not get tax relief. This is generally not a good idea though because when you come to draw your pension most of the money you take out will be taxable. If you're not going to get tax relief on a pension contribution you're better off putting the money in a Stocks & Shares ISA, which is not taxable when the money is removed from the ISA.

You both have DB pensions, which is good. Other than that you don't have a lot of pension provision, especially considering that you plan to retire relatively young. It depends on what other money you have and how much you plan to spend in retirement, though I would crunch the numbers and see how feasible your plan to take a career break is. 

What_time_is_it

Thanks for the responses guys. Really appreciate it.

It sounds like maybe the best option would be to us both to invest the redundancy money in something else then? We've maxed out our ISA contributions for this year. Like I say we have about £300k in savings that are locked away. Plus around £200k in accessible savings to get us through the next couple of years and beyond and cover most eventualities in the next few years.

The numbers just about check out in a worst case scenario. If we were to never work again and if the state pension still exists from, say, age 70, then we would be able to live off around £30k a year between us I think. We'd draw our pensions as early as possible in those circumstances.

What investment products would you advise that we invest in? Or do we need an IFA?

What_time_is_it

...and in the time between now and redundancy we should max out on salary sacrifice and contributions from our earnings, right?

leosayer

I'm currently doing similar because I am receiving a redundancy payment in December and don't expect to work again after that.

As mentioned, you won't get tax/NI relief on redundancy payments below £30k via salary sacrifice so instead you could look to sacrifice your remaining monthly salary between now and the end of the year. You need to ensure you don't sacrifice below minimum wage and ensure you still receive enough to accrue state pension if necessary.

In summary, by doing this you will get relief at 28% (20% basic rate tax plus 8% NI) and when you come to draw it, you can expect to pay a tax rate of 15% (20% income tax rate after 25% tax free cash is taken). Of course, this assumes tax rates stay the same.