Paying redundancy payment into private pension

Dazed_and_C0nfused

Bah_humbug said:

Thanks for replying , I'll try and rephrase. Assuming I take the redundancy , they will pay me £90k ( £30K will be tax free ) the other £60k will be subject to tax at 40% so I'll get £36k. If I pay the £36k into a SIPP can I claim back the tax so it becomes £60 K again? The following year I would access the money   use it as income at which point I'd have £12570 tax free , most of the rest at 20% ,the last  bit at %40. Is that possible? Note I will have unused allowance in previous years.

No.  If you add £36k to a relief at source pension like a SIPP then that will have £9k added in basic rate tax relief, giving you a gross contribution of £45k.

That £45k will then increase your basic rate band (and the higher rate threshold) meaning more income is taxed at 20% and less at 40%.  And possibly more is taxed at 40% instead of 45%.  But the personal tax saving is not a fixed amount, it all depends on your taxable income (and types of income) in the tax year you make the contribution.

Bah_humbug

Thanks for your help , that is disappointing  (& confusing). I will now spend two hours googling relief at source. 🙄. I'm used to being PAYE with 35+ years in the same firm  so not used to thinking about these scenarios! 

Dazed_and_C0nfused

Bah_humbug said:

Thanks for your help , that is disappointing  (& confusing). I will now spend two hours googling relief at source. 🙄. I'm used to being PAYE with 35+ years in the same firm  so not used to thinking about these scenarios! 

Relief at source is where you make a net contribution and the pension company, courtesy of HMRC, add 25% to the amount you pay.

The basic rate relief is always 20% of the gross amount, for example £45k would be £36k from you and £9k in tax relief.  If doesn't matter what tax band you are in, the relief added to the pension when you make a contribution which is eligible for tax relief, is always basic rate.

Bah_humbug

Thank you that is very helpful.  , from a timing perspective I'd get a P45 and the firm will have  taxed my last last month's pay and the redundancy payment. I then pay the £36K  into the SIPP, they add the £9k relief at source,  When could I then make the adjustment discussed to add the £45k to my 20%  tax band?. Do I have to do a self assessment next FY or could it  be done as soon as I have the paperwork etc. in the same tax year? 

NickPoole

Can you pay the £60K gross into your existing DB pension and get some more pension, even if you have maxed out lump sum?

Marcon

Bah_humbug said:

Hi new to the forum and have a related question to the OP. I am  shortly going to be offered MAVE (voluntary redundancy).
Totalling £90k to leave within this FY.
 I have a DB/ final salary pension and have tried to maximise my lump sum to just under the £268k so I think there is  no point asking my employer  to add any of the £90k to this at this point.

But you can get a bit more tax free cash on top of that... 

Bah_humbug said:

 My question is: could I start a SIPP, pay the redundancy money in  (not the tax free £30K)  the £60K   ( or what's left of the £60K after tax  at 40% & possibly 45%?)  and then claim the tax back so it becomes £60K again in the SIPP ? My plan would then be to draw it down the following FY e.g. 6 April 2026 onwards  as income.   The following year April 27, the DB scheme would begin to pay out as I hit will 60 yrs old  March 2027. The point of doing this being that id only pay 20% tax on most of the 60k as opposed to 40%.

You need to look at two things:

• whether you have any scope to use 'carry forward' (https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward) If you do, then you can contribute more than £60K in the tax year (your personal contributions + tax relief, and the value of your employer's contributions) and get tax relief
• using the 'small pots' regime to access funds you've paid into a SIPP https://www.litrg.org.uk/pensions/pension-withdrawals/small-pensions#4) This would enable you to take up to 3 'pots' of no more than £10K each, with 25% of each 'pot being tax free in addition to the Lump Sum Allowance.

This is all likely to be as clear as mud to you, but hopefully you'll have got the gist of it: do things correctly and you've got a significant tax saving. Given the amount of cash involved, and the scope for saving tax (or massively messing up!), might be no bad idea to invest a bit of your forthcoming redundancy pay in getting some personal financial advice?

Bah_humbug

NickPoole said:

Can you pay the £60K gross into your existing DB pension and get some more pension, even if you have maxed out lump sum?

I don't believe I can. There is something called added years which might allow it though so I will investigate. I will need to access the SIPP to bridge the year until the DB kicks in. If I take it a year early I lose 5%.  We are allowed to do AVCs and my AVCs combined with my 3xP lump sum will be approaching the £268k threshold anyway .So putting more in AVCs is counter productive I think. 

Bah_humbug

Marcon said:

But you can get a bit more tax free cash on top of that... 

You need to look at two things:

• whether you have any scope to use 'carry forward' (https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward) If you do, then you can contribute more than £60K in the tax year (your personal contributions + tax relief, and the value of your employer's contributions) and get tax relief
• using the 'small pots' regime to access funds you've paid into a SIPP https://www.litrg.org.uk/pensions/pension-withdrawals/small-pensions#4) This would enable you to take up to 3 'pots' of no more than £10K each, with 25% of each 'pot being tax free in addition to the Lump Sum Allowance.

This is all likely to be as clear as mud to you, but hopefully you'll have got the gist of it: do things correctly and you've got a significant tax saving. Given the amount of cash involved, and the scope for saving tax (or massively messing up!), might be no bad idea to invest a bit of your forthcoming redundancy pay in getting some personal financial advice?

@Marcon Thanks for your help :
I believe I have scope to carry forward due to the year when CPI was 10+, lack of pay rises etc..

Small pots: Apologies if this is a stupid question : would that entail setting up 4 Sipps , 3 that I put  £8k in and one with £12k in ? The RAS makes them 3 x  £10k and £15k which I then claim the tax back on?  Then I get 25% of each £10k tax free and the rest at whatever my marginal rate is ? 

😵‍💫 Financial advice might be a good idea!.🤯

Marcon

Bah_humbug said:

Marcon said:

But you can get a bit more tax free cash on top of that... 

You need to look at two things:

• whether you have any scope to use 'carry forward' (https://www.moneyhelper.org.uk/en/pensions-and-retirement/tax-and-pensions/carry-forward) If you do, then you can contribute more than £60K in the tax year (your personal contributions + tax relief, and the value of your employer's contributions) and get tax relief
• using the 'small pots' regime to access funds you've paid into a SIPP https://www.litrg.org.uk/pensions/pension-withdrawals/small-pensions#4) This would enable you to take up to 3 'pots' of no more than £10K each, with 25% of each 'pot being tax free in addition to the Lump Sum Allowance.

This is all likely to be as clear as mud to you, but hopefully you'll have got the gist of it: do things correctly and you've got a significant tax saving. Given the amount of cash involved, and the scope for saving tax (or massively messing up!), might be no bad idea to invest a bit of your forthcoming redundancy pay in getting some personal financial advice?

@Marcon Thanks for your help :
I believe I have scope to carry forward due to the year when CPI was 10+, lack of pay rises etc..

Small pots: Apologies if this is a stupid question : would that entail setting up 4 Sipps , 3 that I put  £8k in and one with £12k in ? The RAS makes them 3 x  £10k and £15k which I then claim the tax back on?  Then I get 25% of each £10k tax free and the rest at whatever my marginal rate is ? 

😵‍💫 Financial advice might be a good idea!.🤯

Nothing remotely stupid about checking things you're unfamiliar with (stupidity would be taking the action before checking...and then finding you can't undo it!).

I understand from others posting on this forum that HL https://www.hl.co.uk/pensions/sipp will 'carve out' 3 pots from a larger SIPP held with them to enable you to access each of these as a 'small pot'. I've never done it, so if anyone could kindly add the link where HL confirm this is something they do, that would be appreciated please (otherwise I'd contact them direct to make sure they will do that).

Yes, under current legislation 25% of each £10K pot is tax free in addition to your Lump Sum Allowance, and the rest is taxed at your marginal rate.

As you say, some financial advice might be no bad thing...

MetaPhysical

...and we expect Jo Public to understand this stuff and operate tax efficiently????