Sanity check on whether to contribute redundancy payment to pension

BobR64

I am going to receive a redundancy payment in a couple of months and have now effectively retired a few months earlier than I originally intended. A couple of people have mentioned that I should consider putting some of the payout into my pension but they don't necessarily have all my details. I am minded not to do this but just wanted to run a sanity check on my thinking to see if it makes sense.

I was on a good salary by the end and the redundancy is generous. I am consequently well into the 45% band this year. Even if I max out my remaining pension allowance including the little that is unused from previous years, I am still not going to avoid losing my personal allowance. My SIPP is ~£1.3M so I am past the maximum tax free amount. Anything I add to my SIPP now, I am unlikely to be able to take out at less than a 40% tax rate.

Therefore, the way I am looking at it is that any benefit of using my SIPP is marginal. Does this seem sensible or am I missing something?

My plan is to use the redundancy as income until we are into the next tax year. I have a couple of small DBs that I will delay activating until then and I'll also start to withdraw from the SIPP, as per my original retirement plans. I'll add to my ISA this year and next and anything left over will be fun money to be shared with my wife and son.

Part of me feels like I am being slightly profligate and that I should be trying to do more with it, but the other part is telling me not to stress as I was already in a good position and I should just enjoy the fact that I have been paid to retire a bit earlier.

ali_bear

Like you say, fortunate to be paid to retire earlier than planned.

You probably do want to pay the maximum into SIPP if only to pay less income tax in the 45% band. You may just be paying a little tax at 40% after retirement, depending on your age. It depends also on whether you'd rather have the money now, or later.

El_Torro

You may or may not know that when you earn between £100k and £125k a year you are effectively paying 60% on anything above £100k. So if you can put enough in your pension to keep your income at £100k or below this will help your tax position a lot. This may depend on you having enough carry forward to achieve this.

sheenas

There is normally a Tax free element and the rest of the redundancy is taxed, along with pay in leu of notice maybe. I would consider as above using the pension to reduce the amount of Tax you pay. If you are over 55 you could then simply consider taking a Tax free lump sum out of your pension. When I was made redundant they paid for a financial adviser, maybe they will be up for that?

BobR64

https://forums.moneysavingexpert.com/discussion/comment/82147442#Comment_82147442

Yes, this is the key thing as far as I am concerned. As I mentioned, I can't put enough in to avoid this "tax trap" so I am resigned to losing my personal allowance. Once that is gone, the benefit of adding more to the SIPP seems marginal given that I will have ISA allowance that I can use.

kermchem

If you have a spouse then you might explore the mathematics of using the redundancy to maximise their pension contributions, or at least check if they can save more tax than you.

Triumph13

There is marginal and marginal. 45% relief on the way in vs 40% tax on the way out is a 9.1% gain (£55 ⇒ £100 ⇒ £60). As kermchen say though, do check that your spouse can't beat that.

BobR64

https://forums.moneysavingexpert.com/discussion/comment/82148011#Comment_82148011

I think there are limited options to use my wife's pension as she's winding down to retirement herself and is very part time this year, so not earning much. I will do some calculations anyway.

But it's a good point about it actually being a 9% difference. I suppose my mindset has been to think in terms of trying to take income from my SIPP at a 20% tax rate, but even if I put in an extra lump this year and took it out at 40% next year that is a gain worth having.

Thanks to you and to everyone who has replied. I was in two minds about posting this question but as usual I have been given some things to think about.