Redundancy and Pension Payment - sanity check

adspence · 11 March 2018 at 11:55AM

Hi folks

I'm just in the process of going through redundancy and just wanted a quick sanity check on my plan to put as much of the redundancy payment into my pension.

Redundancy Payment = £104K
Redundancy Payment Date = will be some time in April/May 2018
Tax free portion = £30K

Pension Contributions
For the last three years I've been paying into a SIPP and getting 40% tax relief (20% directly in the SIPP and 20% in tax return), and the work pension is via salary sacrifice (work puts in 15% and I put in 5%).

2015-16= SIPP=£5745.44 (£8043.62 with tax relief), Work =£26545.44. Unused Allowance = £11156.38
2016-17= SIPP=£6000 (£8400 with tax relief), Work=£20800, Unused Allowance = £10800
2017-18= SIPP=£6000 (£8400 with tax relief), Work=£20800, Unused Allowance = £10800

By these calculations this gives me £32756.38 in carry forward for the last three years.

QN: does the 20% claimed through the tax return count as contributions even though they don't actually end up in my SIPP? I've assumed they do.

This should mean that of the taxable £74K of the redundancy payment I can put in approx £72K (2018-19 £40K + carry forward) - which would be for 2018-19 tax year. I'd stop paying monthly into my SIPP.

I shouldn't have a problem with "relevant earnings" as I believe that the £74K is treated as relevant, so that is the cap I would be working to because I don't know yet when I'll get a new job, or more likely simply retire if the numbers stack up.

Does this sound right?

Separately I'll be getting 3 months notice paid off, so I'm guessing that I'll be stung with a 40% tax bill for that if they think it is my monthly earnings! I'd then have to go through the rigmarole of reclaiming that from HMRC, right? It's probably part 0%, part 20% if I don't end up working in 2018-19.

While it's come as a bit of a shock and bit early, as I'm not yet 55, I think I'll take the opportunity to retire early if financially viable.

The tax-free portion of the redundancy and notice payments should get me through the next couple of years until I can get access to the pension...provided the figures as above are correct.

Any thoughts most appreciated.

Linton · 11 March 2018 at 5:31PM

Your calculations seem a bit off. For example if you pay £6K into your SIPP it is £6K+20% tax relief =£7500 that actually goes into the SIPP. 80% of £7500=£6K. It is the £7500 that counts against the £40K limit.

When working out the £40K limit and the tax it makes it much easier if you base your calculations on the gross SIPP payment rather than the net.

So if you want to get £74K into your SIPP you actually contribute 80% of £74K= £59200. The missing £15800 will be added by HMRC. Any 20% higher rate tax will be returned to you rather than your SIPP.

Pun · 11 March 2018 at 5:41PM

Redundancy always comes as a shock, even when it isn't a surprise - somehow you never expect the axe to fall.

Much of what you say about topping up your pension to maximise tax relief makes sense, but I do wonder if a meeting with a competent financial adviser might be worthwhile. Once they have an overall picture of your situation (personal and financial) they may give you some ideas which would be of considerable help.

adspence · 11 March 2018 at 6:07PM

Linton wrote: »

Your calculations seem a bit off. For example if you pay £6K into your SIPP it is £6K+20% tax relief =£7500 that actually goes into the SIPP. 80% of £7500=£6K. It is the £7500 that counts against the £40K limit.

Yes, you are right it is only £7500 that ends up in the SIPP, but overall it is 8043.62 after claiming the other 20% back. Are you sure it is the £7500 that counts against the limit? If so, then I have more capacity in unused allowances, which is good.

So if you want to get £74K into your SIPP you actually contribute 80% of £74K= £59200. The missing £15800 will be added by HMRC. Any 20% higher rate tax will be returned to you rather than your SIPP.

I was under the impression that what I was trying to do here was put in the redundancy payment directly into the pension gross, It would be the work pension not the SIPP, and there would be no tax relief required - the work pension plan calls it a "severance waiver", unless what they are actually doing isn't what I think. Wouldn't it simply be like a salary sacrifice but using the redundancy money instead?

Saves a lot of messing around with a) getting the redundancy immediately taxed at 40% and b) having to reclaim 20% tax relief and all the palaver filling in forms for HMRC to get this back...and it not ending up in my pension anyway.

adspence · 11 March 2018 at 6:12PM

Pun wrote: »

Redundancy always comes as a shock, even when it isn't a surprise - somehow you never expect the axe to fall.

Much of what you say about topping up your pension to maximise tax relief makes sense, but I do wonder if a meeting with a competent financial adviser might be worthwhile. Once they have an overall picture of your situation (personal and financial) they may give you some ideas which would be of considerable help.

Indeed I do plan to contact an IFA, and in fact they partner with a firm to provide one IFA consultation free of charge. (No obligation to use them of course). It's just that I have quite a short turn around before this has to be sorted out, especially as I'll be on vacation for some of the period before the termination date. Hence getting some opinions here first.

Linton · 11 March 2018 at 6:23PM

adspence wrote: »

Yes, you are right it is only £7500 that ends up in the SIPP, but overall it is 8043.62 after claiming the other 20% back. Are you sure it is the £7500 that counts against the limit? If so, then I have more capacity in unused allowances, which is good.

100% sure - it is the money that ultimately ends up in the SIPP (the gross contribution) that counts. The rest of the apparent complexity is just moving money around so that the tax taken is calculated correctly and compatibly with PAYE. When calculating payments into a personal pension and tax always think in terms of gross contributions, otherwise you will almost certainly get confused.

I was under the impression that what I was trying to do here was put in the redundancy payment directly into the pension gross, It would be the work pension not the SIPP, and there would be no tax relief required - the work pension plan calls it a "severance waiver", unless what they are actually doing isn't what I think. Wouldn't it simply be like a salary sacrifice but using the redundancy money instead?

Saves a lot of messing around with a) getting the redundancy immediately taxed at 40% and b) having to reclaim 20% tax relief and all the palaver filling in forms for HMRC to get this back...and it not ending up in my pension anyway.

Yes, if you are paying the extra pension through the employer and the employer operates a "Net Pay arrangement" whereby pension money is taken from gross income then everything works out simply.

adspence · 11 March 2018 at 6:48PM

Linton wrote: »

100% sure - it is the money that ultimately ends up in the SIPP (the gross contribution) that counts. The rest of the apparent complexity is just moving money around so that the tax taken is calculated correctly and compatibly with PAYE. When calculating payments into a personal pension and tax always think in terms of gross contributions, otherwise you will almost certainly get confused.

Yes, if you are paying the extra pension through the employer and the employer operates a "Net Pay arrangement" whereby pension money is taken from gross income then everything works out simply.

Thanks. So I've more unused allowance than I thought from the previous 3 years, which is good news as I might have a little bit left to top up through the rest of the tax year.

Redundancy and Pension Payment - sanity check

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