Saving on paying Tax with my Redundancy Pay

gally56

Firstly thank you for taking the time to read and the possible advice.
Ok so after 33 years (Age 56)  I will be made redundant and luckily my Employer is giving me a not to shabby package with 2 options for early retirement.

Option C  Enhanced Severance with retirement / early retirement

Enhanced Severance Terms		£56,080.20
Special Payment – 9 weeks’ pay		£6,117.84
Special lump sum		£16,500.00
Retraining & reskilling lump sum (this can be used to top of redundancy)		£2,000.00
Total Termination Payment		£80,698.04
Non-Reduced Defined Benefit Pension*:
Option 1 – All pension
Target pension		£12,503.40 (per year)
Option 2 - Tax-free cash and reduced pension
Tax-free cash		£61,577.13
Reduced Target pension		£9,236.52(per year)
Currently I am leaning towards takng the money with a full pension. I am in the 20% tax bracket and the pensions mentioned are for my DB Pension I also have a DC pension set up by the comapny in 2021 with me paying £254 per month and the company matching it currently the pot has £48000 I know I can have £30000 of the redundancy tax fee leaving me 50,698 but as my redundancy will be coming out in May and I will be getting 12 weeks PILON in April I want to keep out of the 40% tax bracket in case I find work (althought not in a rush). If I had stayed with the company my DC Pension would have stopped at 62 so my plan is to pay the equivalent of 6 years into my pension covering payments both my employer and the company would have made up to then. So how can I reduce my tax payments that will be coming out. Once again thank you

HedgehogRulez

Ouch, the formatting of those numbers isn’t great: can you edit?

Green_hopeful

I am not sure I can answer your questions but I put my taxable unfair dismissal money (over the £30,000) into a SIPP pension and got the tax rebate. I then take the tax free £16760 per year which is £12,570 personal allowance plus £4,190 tax free. I had to live on savings until I got to 55 which isn’t an issue for you. That way I can leave my pensions for a bit longer. 

Cobbler_tone

There isn't enough info there to make an informed decision but I am sure you have it and that you can calculate the best route for you.
Have you explored them paying (over £30k) severance into the DC pension? If so, that sorts out your tax exposure and will go a long way to filling in your future missing years. They should do that if you ask.
If paying 40% tax you would get stung for c£20k tax (if you just took it) but depending on timing and other income you might get a rebate.
Assuming you pay higher tax on it and take the lump sum, do you need c£120k of cash, i.e. taking the severance and option2?
How much income do you want/need to have each year?
Are you planning to work again? 

A balanced decision may be to pocket £30k tax free, put the rest in your DC and take the higher pension but that depends if it meets your needs.

Secret2ndAccount

Is the PILON effective April 1st, or April 30th? That’s two different tax years.

If it’s after April 6th, then your taxable income for 25/26 could look something like this:

PILON 10k

Earnings April+May  5K

Severance (minus 30k tax free) 51k

Pension June-April  10k

Total taxable: 76k

So you would want to pay at least 26k into a pension to avoid higher rate tax. You could ask your employer to do it, or open a SIPP and pay in 21k yourself. Taxman would top it up to 26k+ (think of it as a refund of 20% tax). To the extent you had paid 40% tax, you would get a refund from the taxman later. End result, no 40% tax.

However, if you are giving up work, this is your last chance to plough money into a pension. You can draw it out again when you need it, and you get 25% tax free, and the rest taxed at 20%. Many people would pay the entire 51k (or even 66k) into their pension, and pay in a good proportion of whatever you’ve earned this year, before April 6th. Two things to consider before doing this:

1. How are you funding your retirement? There’s the 12k pension. Do you have any savings? Do you need to keep some money handy to meet your monthly spending plans?

2. If you draw any of the taxable part out of the DC pension, you will trigger the MPAA. In English, that limits your future pension contributions to 10k per year, you + your employer + tax refund. So if you plan to get another job, you wouldn’t then have a second opportunity to boost your pension savings before you stopped working. So that’s a marginal, potential downside to putting all your money into the DC.

The Annual Allowance (total of all payments into your pension) for those who haven’t triggered the MPAA is 60k. You could exceed that next year if you go all in. That’s okay. You can carry forward unused Annual Allowance for 3 years, so you probably have a lot of headroom to work with.

On the subject of the DB pension, your commutation rate is decent, not fantastic. Given your young age, probably better to go with the larger lifelong pension. What are the yearly increases with your DB scheme? Some offer no increases, ranging up to inflation increases with no cap. If yours is 0% or capped at 2.5% then you might consider the lump sum. If it’s capped at 5% or 10%, better to have the extra pension.

Marcon

Secret2ndAccount said:

Is the PILON effective April 1st, or April 30th? That’s two different tax years.

If it’s after April 6th, then your taxable income for 25/26 could look something like this:

PILON 10k

Earnings April+May  5K

Severance (minus 30k tax free) 51k

Pension June-April  10k

Total taxable: 76k

So you would want to pay at least 26k into a pension to avoid higher rate tax. You could ask your employer to do it, or open a SIPP and pay in 21k yourself. Taxman would top it up to 26k+ (think of it as a refund of 20% tax). To the extent you had paid 40% tax, you would get a refund from the taxman later. End result, no 40% tax.

However, if you are giving up work, this is your last chance to plough money into a pension. You can draw it out again when you need it, and you get 25% tax free, and the rest taxed at 20%. Many people would pay the entire 51k (or even 66k) into their pension, and pay in a good proportion of whatever you’ve earned this year, before April 6th. Two things to consider before doing this:

1. How are you funding your retirement? There’s the 12k pension. Do you have any savings? Do you need to keep some money handy to meet your monthly spending plans?

2. If you draw any of the taxable part out of the DC pension, you will trigger the MPAA. In English, that limits your future pension contributions to 10k per year, you + your employer + tax refund. So if you plan to get another job, you wouldn’t then have a second opportunity to boost your pension savings before you stopped working. So that’s a marginal, potential downside to putting all your money into the DC.

The Annual Allowance (total of all payments into your pension) for those who haven’t triggered the MPAA is 60k. You could exceed that next year if you go all in. That’s okay. You can carry forward unused Annual Allowance for 3 years, so you probably have a lot of headroom to work with.

On the subject of the DB pension, your commutation rate is decent, not fantastic. Given your young age, probably better to go with the larger lifelong pension. What are the yearly increases with your DB scheme? Some offer no increases, ranging up to inflation increases with no cap. If yours is 0% or capped at 2.5% then you might consider the lump sum. If it’s capped at 5% or 10%, better to have the extra pension.

Won't be 0% - look at the dates of membership.

OP - in your post you have the sentence 

Non-Reduced Defined Benefit Pension*:

The * relates to something which isn't in your post - please could you add it in case it's relevant to trying to answer?