Redundancy lump sum into pension?

[weeve]

Hi. Seems I’m going to be made redundant before the financial year end. Literally with a F off payment made end of March. Perfect timing… dooh. Company will pay a decent redundancy payment but as it’s more than statutory they won’t break it down into what it is made up off as ‘discretionary’ … they just give a headline number.

I’d like to open a personal SIPP in the new year and dump some money in in advance of the payment in good time to be in 24/25 year of tax (as much as possible of the headline figure noting 30k is tax free etc) I have unused allowance from the last two years so I have headroom. However, I’m aware redundancy payments aren't same as earnings per se so fully expect I’m not allowed to put much in and get the pensions tax allowance from it. Maybe ?

The Company will also tax the redundancy payment (on an ‘estimated’ code basis) and it’s down to me to reconcile through self assessment in 2025. All a bit of a faff really. As I need to deal with overseas salary as well.

Anyone know how to maximise pension dumping here before financial year end with insight into dealing with such payments? I’m about to contact my works tax accountants and they will help with my tax return but the help they are commissioned for is all for after end of the tax year for self assessment reconciliation. I should (will) find someone else to help but any advise from those who know how to handle this or have been here before is most welcome as I need to make any SIPP payments before 5 April obviously.

[MadCaptainJack]

weeve said:

I’d like to open a personal SIPP in the new year and dump some money in in advance of the payment in good time to be in 24/25 year of tax (as much as possible of the headline figure noting 30k is tax free etc) I have unused allowance from the last two years so I have headroom.

I'm sure someone will correct me if I'm wrong but my understanding is that you can only make use of unused allowance from previous years if you had already opened the pension beforehand.

As for the rest, this being Pistonheads, I assume your salary is substantially more than £60k p.a., so just bung as much as you can up to a max of £48k (the SIPP provider will claim the other £12k from HMRC for you).

[weeve]

Yes allowance wasn’t used but was available as the pension was open before. However that was a work pension used previosuly and held limbo while I worked overseas for them….which started again with UK earnings part way through the year.

So ..obviously work won’t pay anything into that work pension from the redundancy payment as I will be off payroll the previous month and my (and their) contributions will have stopped and that’s that.

…So my understanding is I can open a personal SIPP, use the allowance available etc to get a gvt contribution as you say. However, my challenge is how much could go in as the bye bye we hate you payment isn’t ‘salary’. Could it theoretically be all the unused pensions allowance? Or err 10 pence? I haven’t a clue….

[markiii]

They don't care where the money comes from so long as you have sufficient earnings for that level of tax relief in that yeat

[Tighnamara]

Unless I have read wrong, you were out of country and U.K. pension only started again part way through the year.

Not sure there would be any large tax relief for the unused years if not paying U.K. tax during that period.

[weeve]

Thanks. In my head then it goes redundancy ‘earnings’ (sum paid less the tax free amount) can go into a SIPP pension to the max allowance remaining covering 22/23 - 24/45 ..so .40k+ 60k +60k ) less any ‘contributed to pensions this year to date’

Edited by weeve on Sunday 1st December 22:02

[weeve]

Tighnamara said:

Unless I have read wrong, you were out of country and U.K. pension only started again part way through the year.

Not sure there would be any large tax relief for the unused years if not paying U.K. tax during that period.

Indeed but apparently as my pension was established beforehand and was just empty while being away the allowance is there to use. I asked my works tax folk that last year as I was skeptical (still am) but they were advising it was good to use.

[Tighnamara]

weeve said:

Indeed but apparently as my pension was established beforehand and was just empty while being away the allowance is there to use. I asked my works tax folk that last year as I was skeptical (still am) but they were advising it was good to use.

That’s a winner if you can use the unused allowance and get the tax benefits,

[markiii]

You can use the tax years but you will only get tax relief on an amount equal to your earnings in the year you deposit it

[bompey]

I would take the £30k tax free and put the amounts over that into the pension.

[5pen]

weeve said:

Yes allowance wasn’t used but was available as the pension was open before. However that was a work pension used previosuly and held limbo while I worked overseas for them….which started again with UK earnings part way through the year.

So ..obviously work won’t pay anything into that work pension from the redundancy payment as I will be off payroll the previous month and my (and their) contributions will have stopped and that’s that.

…So my understanding is I can open a personal SIPP, use the allowance available etc to get a gvt contribution as you say. However, my challenge is how much could go in as the bye bye we hate you payment isn’t ‘salary’. Could it theoretically be all the unused pensions allowance? Or err 10 pence? I haven’t a clue….

Have you checked with your employer about the bit in bold? Surely you are on the payroll until the final severance payment?

When I was made redundant, I instructed my employer how much of the severance payment should be paid into my pension and they did so. That way handles the tax relief too. Also, the company scheme is still YOUR pension. Who is it with? My company scheme was managed by Aviva and I’ve continued to make payments into it since leaving the job (I had no other pension from a subsequent employer).

You’re probably aware already, but it’s worth remembering that the £30k tax free element doesn’t count as relevant earnings when calculating how much of a pension contribution you can make in the current tax year.

[weeve]

Checked. They pay it one month after last day on payroll and won’t put in their pension

[SoliD]

I'm the same as weeve, due to take severance at the end of the year and asked about putting my PILON direct into my pension but it's not possible unfortunately, will just have to take the hit on my NI and claim the relief back. Also with Aviva.