If you were already planning to retire then retiring after a redundancy is the jackpot position to be in.
Not only were you going to leave your job anyway but now you also get a pay-out to add to your retirement savings and make the transition into retirement easier.
If you are in this position then consider this one trick before you do anything else.
Boosting your pension pot when retiring after a redundancy
Up to £30,000 of your redundancy payment is tax free. Anything above this is taxed at either 20%, 40% or 45% depending on what other income you have earned in the same tax year.
Now you could park the redundancy pay-out in a bank account and start using it for your first year of retirement income.
Or you could pay some or all of it into a pension.
By paying your redundancy money into a pension you will be able to reclaim tax which in turn will increase the overall amount you can get.
We recently started working with Stuart and Jessica. Both are 64 and planning to retire at the start of 2022.
Stuart was offered the chance of voluntary redundancy which he applied for and got. He is due the sum of £28,000.
Stuart doesn’t really need the money as he has other pension savings and investments which we have calculated could provide him with the £3,000 per month retirement income he desires.
As Stuart is a basic rate Income Tax payer, by contributing the £28,000 redundancy pay-out into his pension he receives tax relief of £7,000. This means his contribution turns into £35,000 inside his pension.
If Stuart had been a higher rate Income Tax payer then he could have claimed a further £7,000 from the tax office meaning a super £14,000 boost to his overall retirement savings just by contributing to a pension.
Now once inside the pension if Stuart was to withdraw money for his retirement he may pay tax on it, but as Stuart has other savings and investments we are able to use various tax allowances to ensure he takes money out of his pension tax free for a number of years.
Things you need to consider when retiring after a redundancy
Before boosting your pension pot when retiring after a redundancy you need to consider the following:
- If you are going to put your redundancy pay-out into a pension then you need other savings and investments. You need other resources to provide you with an income so you can make best use of the tax allowances available to you.
- You cannot take money out of a pension until age 55 (changing to age 57). So keep this in mind if you are going for early retirement!
- You need to contribute your redundancy pay-out into your pension in the same tax year as you were working. The rules state you can only contribute into pensions the lower of 100% of your gross salary or £40,000 (pension Annual Allowance).
- You need to factor in pension contributions already made. If you have been making pension contributions anyway throughout the year you need to factor these and your redundancy contribution into your overall allowance.
- Even if you had no other earnings (because perhaps you missed the end of tax year) you could still contribute up to £2,880 into your pension. This would still earn you £720 in tax relief and you could even consider topping up your spouse’s pension if they have earnings.
- Your pension Annual Allowance may be reduced if you have previously taken money out of your pension. This is called the Money Purchase Annual Allowance and will limit what you can put into pensions.
- Be careful of Tax Free Cash Recycling rules. If you have previously taken money out of your pension by way of a tax free lump sum then again you may be limited in what you can put back in.
Professional advice is essential in this area, not only to ensure that you don’t accidentally fall foul of any rules but also to ensure you maximise the tax savings applicable to you when retiring after a redundancy.
If you would like a no obligation assessment of your current position please schedule a 15-minute call.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.