A SIPP to reduce tax on redundancy payment?

BrownHen

I may be made redundant from my NHS ICB job, probably in the next tax year. My statement from HR quotes a payment of £89000. I have a second income from 2 rental properties, around £18000 pa. I am 59 yo and could take a slightly actuarially reduced pension ( NHS 1995 pension)- or wait till I hit 60 in Dec 2026. Would be around £13500 pa. As the first £30000 only are tax free, does it make sense to put a portion in of redundancy money in a SIPP ( not something I’ve ever done as have worked for NHS all my life and just contributed to NHS pensions schemes). What is the best way to do this? Put in enough to stop me hitting/ minimise  higher rate tax band? 
Also, I understand that when you take money out of a SIPP, you pay tax on it- is that correct and if so how are you taxed? Via self assessment? So is the main benefit of a SIPP here to control how much tax you pay in a  given year rather than one big hit at the outset?

Finally, is it correct that the money needs to be transferred into the SIPP via your employer rather than your personal bank account, to get the tax benefit? Thanks for any answers. 

Markdavid1962

I paid money in to a SIPP after receiving it from my employer and received the tax relief claimed by the SIPP provider, then as a higher rate taxpayer I claimed the additional tax relief on my tax return. Can you ask HR to pay in to your existing pension or the SIPP to reduce tax (that was an option when I took a redundancy package) 
Once the money is in the SIPP as your over 55 you could take 25% tax free, lots of information here on SIPP's or look at Hargreaves Lansdown.

I also retired at 60,after redundancy so understand your position

BrownHen

Thank you Mark, that is helpful. Maybe paying into the NHSs current pension scheme ( the 2015 which I can access at 67 ) would be an option as it would simplify masters and mean I don’t have to administer a SIPP. If it does come down to redundancy I will explore that option. 

alanfp

Administering a SIPP is fairly straightforward. Deciding what to invest in isn't, but that's your choice/risk.  When I was in a similar position to you I knew I'd be withdrawing the entire amount from my SIPP over the next 2-3 years (and deferring taking my occupational pension so as not to suffer early payment deductions) - so I invested it all in a cash fund. I wasn't interested in its growth over 2 years, purely the tax advantages.. And I didn't want to risk its value dropping over those 2 years.
This is not an advert nor a recommendation, but HL were very easy to deal with.

alanfp

Last Q -  you can pay directly into your sipp without any input from your employer.

BrownHen

Thank you Alan that is a good point. I didn’t know there were cash SIPPs. We may need the money in the next 1-2 years to move home so that is a very good steer. 

monkey-fingers

BrownHen said:

Thank you Alan that is a good point. I didn’t know there were cash SIPPs. We may need the money in the next 1-2 years to move home so that is a very good steer. 

I'm sure you're aware, but just make sure you understand the rules around the 25% you can withdraw tax free. It gets complicated when defined benefits pensions are involved (as I found out).

I did the same as you last year though when I was made redundant. Dumped it into my pension, knowing that later this year when I turn 55 I could (if I needed) take it back tax free.
As my work pension was private, I was able to dump it in without paying NI too.

BrownHen

Thank you Monkey-fingers. I’m just getting my head round all this! Not v financially sophisticated, hazards of being a public sector worker all my life! I didn’t know about the 25% tax free, have just read up on it now!

Xoroi909

I will be made redundant on 31 March 2026 but only paid on 25 April 2026. I was thinking of putting it into a SIPP for a few years then draw it. I will pay 40% tax on my Redundancy because it is so late in the financial year but presumably my SIPP will only begin in 2026/27. So it won't help me to avoid tax. Is my logic correct please?

BrownHen

hi Xoroi I suggest you start you own thread. But surely if you are paid on 26th April that is the new financial year so depending on the size of your payment, a good amount will be taxed at 20% . Up to £50,270 is 20%.

Albermarle

Most likely threads on this subject will be better answered in the pensions forum .

Pensions, annuities & retirement planning — MoneySavingExpert Forum

However a couple of things to note when adding money to a SIPP.

You do not avoid paying tax directly. When you contribute to a SIPP, the provider automatically adds basic rate tax relief to it. The responsibility to not get more tax relief than you are entitled to is yours. You can not add more than your gross earnings . So if you earn £20K, you can add £16K and the provider will claim £4K of basic rate tax relief for you from HMRC and add it to your pension.

If you are a higher rate taxpayer, you report to HMRC your gross pension contributions, and they recalculate your tax and you should get a rebate paid direct to you, not to the pension.

If you have more detailed questions, best to post them in the Pensions forum, giving all relevant details.