Redundancy payment - Keep or increase pension - views

[PF62]

Situation is a 58 year old being made redundant and has been offered a £100k redundancy payment and they intend to retire at this point and take their pension.

If they kept the redundancy payment they would end up with about £72k after tax as everything above the £30k tax free would be taxed at 40%.

However they have been offered the facility to give up the whole of the £100k and instead get a £5k increase in their pension from when they take it at 58. Their pension will get annual CPI increases and has a 50% survivors pension which also increases by CPI. Their pension would be taxed at the basic 20% rate, even with the £5k increase.

They have no debts, a mortgage free house, investments and cash in ISAs, and will get a full New State Pension when they get to 67. They have a spouse who will likely benefit from the pension, but no children or anyone else to leave a lump of money to.

Cash or increased pension, and why?

[anonymous-user]

For me, cash in that situation. They will still get the private pension I assume? Just a lower amount?

Edit: Wait, no, changed my mind. In year 15 £5k per year overtakes the £72k lump sum (not even taking inflation into account). 58 now, so 72/73 by this stage which isn't old. What if this person lives until they're 90+? The lump sum wouldn't make a great deal of sense then. (I think).

Edited by mstrbkr on Sunday 28th June 18:35

[Helicopter123]

Sounds like an uplift to a Final Salary pension?

If so, look's like a no brainer based on the facts stated - take the guaranteed index linked no risk pension payment.

£72k won't drive anything like that return a year, even with significant investment risk.

Unless there are significant assets in the background, or serious health concerns, the value looks to be with the pension.

[TCX]

Helicopter123 said:

Sounds like an uplift to a Final Salary pension?

If so, look's like a no brainer based on the facts stated - take the guaranteed index linked no risk pension payment.

£72k won't drive anything like that return a year, even with significant investment risk.

Unless there are significant assets in the background, or serious health concerns, the value looks to be with the pension.

Sounds reasonable,but personally I'd take the cash,who knows what's coming round the corner ref pension changes,tax in general?

[xeny]

If you're confident it's secure, Pension.

You can't get a reliable £5k/year out of 72K, you're not short of capital, and if you're paying 20% tax after a 5 k increase in income, then more income doesn't seem as if it would go amiss.

[PF62]

To answer some questions.

It is a final salary scheme.
It is safe - well as safe as can be.
No health issues- or at least none known of.

[dingg]

PF62 said:

To answer some questions.

It is a final salary scheme.
It is safe - well as safe as can be.
No health issues- or at least none known of.

Is the employer open to offering a half and half offer? Or maybe paying into the pension fund and taking a chunk out then under the 25% tax free, so you get the extra relief on the way in and benefit of the tax free element on the way out

[foiled]

The 5k pa uplift in pension seems the obvious choice. Would this push you over the 40k pa pension annual allowance, or would it put you over the life time allowance, these would be my 2 main questions.

[PF62]

dingg said:

Is the employer open to offering a half and half offer?

No, all or nothing.

dingg said:

Or maybe paying into the pension fund and taking a chunk out then under the 25% tax free, so you get the extra relief on the way in and benefit of the tax free element on the way out

It was a thought.

foiled said:

The 5k pa uplift in pension seems the obvious choice. Would this push you over the 40k pa pension annual allowance, or would it put you over the life time allowance, these would be my 2 main questions.

No, it wouldn't have any impact on those.

[dingg]

PF62 said:

dingg said:

Is the employer open to offering a half and half offer?

No, all or nothing.

dingg said:

Or maybe paying into the pension fund and taking a chunk out then under the 25% tax free, so you get the extra relief on the way in and benefit of the tax free element on the way out

It was a thought.

foiled said:

The 5k pa uplift in pension seems the obvious choice. Would this push you over the 40k pa pension annual allowance, or would it put you over the life time allowance, these would be my 2 main questions.

No, it wouldn't have any impact on those.

Pension uplift then

[sociopath]

Maybe not possible but why not take the cash and then if they want to they can invest it in a private pension plan, and if they're still working get some/all of the tax back.

Better imho than hoping you live to take all your pension to be at the point when they've got the best deal

[PF62]

anonymous said:

[redacted]

As mentioned at the beginning, they have no intention of working anymore.

[anonymous-user]

It doesn't have to be a "cash or pension" choice. There's a half-way-house.

Take the whole lot in cash, but
Get tax relief on as much as possible above the tax free £30k by investing it into a SIPP.
Then use Flexible Drawdown to manage cash flow to best effect.

All of this will depend upon the individual's overall situation regarding income, taxation and lifetime allowance.

The individual also needs the think very carefully before drawing their main company pension straight away. There may well be an "early retirement factor" that kicks in hard. Could be worth deferring the pension for while to reduce that factor. Depends on the particular facts.

In summary, there's no easy answer. If an employer is offering £100k I'll be surprised if they're not guiding their employees towards taking proper financial advice. For instance, will a cash lump sum push the individual into the 60% effective rate on annual income tax between £100k-£125k? Certainly not attractive to get caught by that!

[DB4DM]

Could use of an AVC help?

[Zigster]

Have I read this right?
You have an option between a £72k (net) lump sum now, or
An additional and increasing annual pension from age 58 of £4k (net).

If you had debts to clear or burning desire to make a few big purchases, I can see the appeal of the lump sum.
But the additional annual pension feels like very good value. If your retirement is comfortably within the 20% tax band (would that change when the State pension kicks in?) then an extra £4k pa is a pretty big proportionate increase to your income. You wouldn’t be able to get the same level of income from the lump sum with any confidence.

[GT03ROB]

Zigster said:

Have I read this right?
You have an option between a £72k (net) lump sum now, or
An additional and increasing annual pension from age 58 of £4k (net).

If you had debts to clear or burning desire to make a few big purchases, I can see the appeal of the lump sum.
But the additional annual pension feels like very good value. If your retirement is comfortably within the 20% tax band (would that change when the State pension kicks in?) then an extra £4k pa is a pretty big proportionate increase to your income. You wouldn’t be able to get the same level of income from the lump sum with any confidence.

If he's getting a 6 figure redundancy settlement his pension must be pushing close to the limits of the 20% bracket. That's a heck of a redundancy payment when you look at what stat minimum is capped at

[Pit Pony]

Can you take the additional £70k which is taxed, put it into a SIPP instead and therefore pay no tax in it.

Personally, for me, at 53, heart attack last week, but prognosis is good for future health, if take the hit now, and use it to reduce my mortgage debt, now.

[Mazinbrum]

rockin said:

It doesn't have to be a "cash or pension" choice. There's a half-way-house.

Take the whole lot in cash, but
Get tax relief on as much as possible above the tax free £30k by investing it into a SIPP.
Then use Flexible Drawdown to manage cash flow to best effect.

All of this will depend upon the individual's overall situation regarding income, taxation and lifetime allowance.

The individual also needs the think very carefully before drawing their main company pension straight away. There may well be an "early retirement factor" that kicks in hard. Could be worth deferring the pension for while to reduce that factor. Depends on the particular facts.

In summary, there's no easy answer. If an employer is offering £100k I'll be surprised if they're not guiding their employees towards taking proper financial advice. For instance, will a cash lump sum push the individual into the 60% effective rate on annual income tax between £100k-£125k? Certainly not attractive to get caught by that!

Pretty much what I’m doing, if you can get your employer to put it into a separate SIPP with the 25% tax free (you don’t have to take it up front) you could get it out tax free over a few years topping up with the cash, this enables you to defer your FS pension and you’ll be better off using more tax free allowance now before you claim your SP. It will be worth having a chat with Nik from IM.

[PF62]

Zigster said:

Have I read this right?
You have an option between a £72k (net) lump sum now, or
An additional and increasing annual pension from age 58 of £4k (net).

Correct.

A redundancy offer which can be used now to provide additional pension (along with the rest of the pension).

Zigster said:

If you had debts to clear or burning desire to make a few big purchases, I can see the appeal of the lump sum.
But the additional annual pension feels like very good value. If your retirement is comfortably within the 20% tax band (would that change when the State pension kicks in?) then an extra £4k pa is a pretty big proportionate increase to your income. You wouldn’t be able to get the same level of income from the lump sum with any confidence.

That was the view, but thought worth checking for alternative thoughts.

GT03ROB said:

If he's getting a 6 figure redundancy settlement his pension must be pushing close to the limits of the 20% bracket. That's a heck of a redundancy payment when you look at what stat minimum is capped at

Pension will still be within the 20% band (but not by an awful lot) when the state pension kicks in. It is just that the redundancy offer is quite generous (and there are a couple of thousand others in the organisation who received offers on the same basis last week, so the total bill will be quite large).

[GT03ROB]

PF62 said:

GT03ROB said:

If he's getting a 6 figure redundancy settlement his pension must be pushing close to the limits of the 20% bracket. That's a heck of a redundancy payment when you look at what stat minimum is capped at

Pension will still be within the 20% band (but not by an awful lot) when the state pension kicks in. It is just that the redundancy offer is quite generous (and there are a couple of thousand others in the organisation who received offers on the same basis last week, so the total bill will be quite large).

Completely off topic but I've never understood why companies make such generous redundancy offers. Sure there are reasons but can think of them!