Redundancy pay

[t4tomo]

https://www.gov.uk/check-eligible-free-childcare-if-youre-working

https://www.gov.uk/guidance/adjusted-net-income#what-adjusted-net-income-is

remember your taxable income does not include the £30k redundancy as that is specifically non taxable income, but will include any redundancy over £30k.

you can offset any employee pension contributions made against it (even if you used the the £30k paid gross to fund it)

be careful though, if the company makes an employer contribution to your pension scheme in lieu of some of the redundancy pay you would have otherwise got, then it that cant be used as an offset (it also wont count as taxed income either though)

 

[atypical_boro]

https://www.gov.uk/check-eligible-free-childcare-if-youre-working

https://www.gov.uk/guidance/adjusted-net-income#what-adjusted-net-income-is

remember your taxable income does not include the £30k redundancy as that is specifically non taxable income, but will include any redundancy over £30k.

you can offset any employee pension contributions made against it (even if you used the the £30k paid gross to fund it)

be careful though, if the company makes an employer contribution to your pension scheme in lieu of some of the redundancy pay you would have otherwise got, then it that cant be used as an offset (it also wont count as taxed income either though)

Thanks. The bit I'm struggling with, though, is if I plan to pay most of it into my pension pot (once I've been paid it, via PAYE) can I tick the governmental box that says 'I do not expect to have a taxable income over £100k this financial year.' It all feels very tentative.

 

[t4tomo]

Thanks. The bit I'm struggling with, though, is if I plan to pay most of it into my pension pot (once I've been paid it, via PAYE) can I tick the governmental box that says 'I do not expect to have a taxable income over £100k this financial year.' It all feels very tentative.

I dont know the amounts involved, and dont expect you to share on public forum, but if you take your gross income for the relevant year, ignore any non taxable income and then deduct of the amount you pay into your pension fund as you're allowed to, then this is your "adjusted net income" per HMRC definitions. so if that is <£100k you can tick the box.

 

[Subbuteo_171]

May be getting made redundant early next year.

Package is pretty decent (£100k +) first £30k tax free then rest subject to tax.

I’ve got the option of putting the rest into AVCs in a DB scheme. Sufficient headroom from a contributions perspective, and then when I take pension seems I can take this lump sum out as AVC pot sits alongside the DB pot - expected to be 2 years time.

So I can effectively have all the redundancy payment tax free. This sounds too good to be true, seems I can save circa £35-45k by waiting 2 years.

Waiting for the scheme to respond to a couple of questions, does this seem right or have I got it completely wrong, entirely feasible as difficult to find answers/reliable info.

 

[the_holgate_roof]

May be getting made redundant early next year.

Package is pretty decent (£100k +) first £30k tax free then rest subject to tax.

I’ve got the option of putting the rest into AVCs in a DB scheme. Sufficient headroom from a contributions perspective, and then when I take pension seems I can take this lump sum out as AVC pot sits alongside the DB pot - expected to be 2 years time.

So I can effectively have all the redundancy payment tax free. This sounds too good to be true, seems I can save circa £35-45k by waiting 2 years.

Waiting for the scheme to respond to a couple of questions, does this seem right or have I got it completely wrong, entirely feasible as difficult to find answers/reliable info.

I’m in the same boat but only getting half the amount you are getting, so taking the first £30k and putting the rest in the pension pot and when you draw down on your pension pot, isn’t the first 25% tax free or something??

 

[1finny]

I’m in the same boat but only getting half the amount you are getting, so taking the first £30k and putting the rest in the pension pot and when you draw down on your pension pot, isn’t the first 25% tax free or something??

Yes its 25% (there is a max you can draw out tho - £268k)
Talk of it getting changed in the budget btw and would be a relatively easy win for the treasury

 

[Boro_Interlinked]

So I can effectively have all the redundancy payment tax free. This sounds too good to be true, seems I can save circa £35-45k by waiting 2 years.

Yeah it is too good to be true . As this is not a complicated case, all the providers of pension knowledge would be all over it and suggesting it as the best workaround ever.
Your AVC even though going through your main DB work provider is just essentially creating a new DC pot , and will most likely be put out to one of those type of providers .
So if you were to put 70k to a new AVC and wait 2 years , lets say growth is now 75k. In order to request to take that ALL out as TF, the provider would notify HMRC and they would notify ALL your other DC pots. So if all your pot totals added to be bigger than 300k , that 75k is 25% so it is within rules at that point, and if acted upon , your other providers would be told that all your 25% allowance had been used and everything they give in future has to be taxed appropriately.
If you don't have any other DC providers then that 75k is just normal, up to 25% first tax free withdrawal, then tax all withdrawals after that.

The only other complicated factor is something called Protected tax free allowance , which can be bigger than the 25% and in my case , Scottish Widows told me about it but I still dont understand it or where it comes from .you would have to research that

 

[WilliamMunny]

Yeah it is too good to be true . As this is not a complicated case, all the providers of pension knowledge would be all over it and suggesting it as the best workaround ever.
Your AVC even though going through your main DB work provider is just essentially creating a new DC pot , and will most likely be put out to one of those type of providers .
So if you were to put 70k to a new AVC and wait 2 years , lets say growth is now 75k. In order to request to take that ALL out as TF, the provider would notify HMRC and they would notify ALL your other DC pots. So if all your pot totals added to be bigger than 300k , that 75k is 25% so it is within rules at that point, and if acted upon , your other providers would be told that all your 25% allowance had been used and everything they give in future has to be taxed appropriately.
If you don't have any other DC providers then that 75k is just normal, up to 25% first tax free withdrawal, then tax all withdrawals after that.

The only other complicated factor is something called Protected tax free allowance , which can be bigger than the 25% and in my case , Scottish Widows told me about it but I still dont understand it or where it comes from .you would have to research that

It’s not too good to be true. The AVC is linked to the DB pension. There’ll be a maximum tax free cash amount from the DB pension, which is usually achieved by commuting some of the pension. However, the AVC can be used to fund tax free cash instead of commuting pension. So yes, it is possible to take 100% of the AVC as tax free cash.

 

[1finny]

It’s not too good to be true. The AVC is linked to the DB pension. There’ll be a maximum tax free cash amount from the DB pension, which is usually achieved by commuting some of the pension. However, the AVC can be used to fund tax free cash instead of commuting pension. So yes, it is possible to take 100% of the AVC as tax free cash.

Isn’t it a bit nuanced?
You can take 25% of your pension pot taxfree

But you can only do it once.
So, if you use it to take your AVC as tax free you are leaving a similar amount in which will be taxed.

Might have it wrong btw

 

[WilliamMunny]

Isn’t it a bit nuanced?
You can take 25% of your pension pot taxfree

But you can only do it once.
So, if you use it to take your AVC as tax free you are leaving a similar amount in which will be taxed.

Might have it wrong btw

It is very nuanced, which is why people need to be careful and should take expert advice.

I’m just pointing out that it is possible to have a redundancy payment paid into an AVC then take the whole amount as tax free cash. Just because it’s possible, doesn’t mean it is always the best option. It will also impact on the TFC available from other pension arrangements. So it is important to consider the bigger picture if there is more than one pension arrangement in place.

You can take tax-free cash from more than one pension arrangement and you don’t have to take the full allowance in one go.

 

[Subbuteo_171]

The plan is to take that cash, then max out the tax free amount from the DB scheme.

Will definitely be getting advice, just hope (selfishly) upcoming budget does not scupper it.

 

[1finny]

Will definitely be getting advice,

Good man

 

[the_holgate_roof]

It is very nuanced, which is why people need to be careful and should take expert advice.

I’m just pointing out that it is possible to have a redundancy payment paid into an AVC then take the whole amount as tax free cash. Just because it’s possible, doesn’t mean it is always the best option. It will also impact on the TFC available from other pension arrangements. So it is important to consider the bigger picture if there is more than one pension arrangement in place.

You can take tax-free cash from more than one pension arrangement and you don’t have to take the full allowance in one go.

This is where I am, my main pension is one of these final salary ones, which gives you a monthly amount, so I don’t see any point in taking a lumper out of that one, would rather take the 25% tax free from the DB pension and draw done as and when required after that.

 

[Boro_Interlinked]

The plan is to take that cash, then max out the tax free amount from the DB scheme.

Will definitely be getting advice, just hope (selfishly) upcoming budget does not scupper it.

You painted a picture though of having 70-80k spare after 30k free , but think you also need to look at annual pension tax relief limits which seem to suggest you can normally only contribute 60k to all pensions in 1 year , which is total , you , your company contribs , plus any one off payments , like this AVC.

 

[WilliamMunny]

You painted a picture though of having 70-80k spare after 30k free , but think you also need to look at annual pension tax relief limits which seem to suggest you can normally only contribute 60k to all pensions in 1 year , which is total , you , your company contribs , plus any one off payments , like this AVC.

That’s a good point, but you can carry forward unused annual allowances from the previous 3 years.

 

[Subbuteo_171]

You painted a picture though of having 70-80k spare after 30k free , but think you also need to look at annual pension tax relief limits which seem to suggest you can normally only contribute 60k to all pensions in 1 year , which is total , you , your company contribs , plus any one off payments , like this AVC.

I can carry forward for 3 years.

 

[t4tomo]

It is very nuanced, which is why people need to be careful and should take expert advice.

I’m just pointing out that it is possible to have a redundancy payment paid into an AVC then take the whole amount as tax free cash. Just because it’s possible, doesn’t mean it is always the best option. It will also impact on the TFC available from other pension arrangements. So it is important to consider the bigger picture if there is more than one pension arrangement in place.

You can take tax-free cash from more than one pension arrangement and you don’t have to take the full allowance in one go.

Yes to say all the redundancy paid into the pension pot can be taken out tax free in 2 years is misleading. Whilst it is quite possible a tax free sum of the same amount can be taken out at that time, that is only because there was already a chunk of pension funds in there that could be taken out tax free i.e 25% of the pot at that time in simple terms.

The extra tax free cash is only 25% of the "Redundancy paid as pension" element (including any growth, or loss, in value over the 2 years)

Its still a decent tax saving a worth doing if you don't need access to all the cash immediately.