Pension 11 – Putting redundancy into pension

I thought that putting redundancy money into my pension would be pretty straightforward. Not as simple as I thought.

Putting redundancy pay into my pension is a way to avoid paying 42% tax and NI, and instead getting 25% of it tax free at age 55 and the rest at 20% tax many years from now. The redundancy comes in two distinct parts: the £30,000 tax free and the remainder that is above 30k. Importantly, it’s a different prospect putting in pay that would have been taxed at 32% – still advantageous but as I wouldn’t get most of it back out of my pension for maybe 20 years it needed thinking about.

The 30k needs to be paid into my bank account like it’s pay. My company didn’t have a way to pay any of it into the company pension provider and to flag it as net pay in need of boosting to gross. It appears in my payslip as a distinct sum that is ignored for HMRC purposes. If I want to put some of it in a pension (which I do) then I make a SIPP contribution from my net pay, the SIPP provider will add 25% (20% of gross), and I will get the remaining 25% (20% of gross) refunded after my tax self-assessment is processed. As this happened near that end of the tax year, I have taxed pay that I can use to make this contribution.

The sum over 30k is easier to move into a pension – my company did it as a salary sacrifice like they’ve done in previous months. The watch-outs for this come in four parts.

First I had to check that nearly a full year’s pay plus redundancy didn’t run afoul of the pension contribution taper (and it took a lot of searching and examples to be sure that I was safe). It didn’t, so I had the full 40k allowance this year.

There’s an annual limit of 40k/year for contributions. First there’s 40k gross this year to use up considering pension contributions to date, then go back 3 years and use 40k minus what I and my employer contributed gross that year, then look at 2 years ago, and if I still needed allowance I’d look at last year. Importantly, the contribution is recorded when it appears in the pension account, not when it showed on my payslip, so my March pay usually appeared in my pension in mid April in the next tax year! I had to check that detail with the techie people at the Pensions Advisory Service. I’ll record it all so I’m clear and so I can tell HMRC if I need.

To claim 40% tax relief on the SIPP contribution I need to pay at least that much 40% tax this year. No countback to other years for this.

I had to get my employer to process the redundancy at the end of February, not end March. If it had been done at end March, it would have appeared in my pension mid April, in a different tax year when I plan to have little or no pensionable income. Goodness knows what would have happened then!

Phew! Now all I need is for the stock market to perform well…. uh oh! (I’m writing this as Coronavirus starts to get a grip on the UK!)