Redundancy payment, best way to save paying tax?
Discussion
Mate of mine on roughly £60K has worked at a firm his whole life (now aged 52) and has a potential £180K redundancy payment.
He's asked his DC pension company and has £153K of carry forward allowance to use up over the previous 3 years.
I said the most efficient way would be take the 30K tax free now and to ask the employer to put the rest (£150K) in his DC pension if he can afford to leave it there for a few years until age 55/57.
But we were wondering would he have an issue with annual threshold (£200K max) or adjusted income (£260K max) that would throw a spanner in the works ? apparently no other sources of income, or are these redundancy numbers just low enough to be under ??
If he just takes the lot now I reckon it would cost him ~70K extra in tax !!
He's asked his DC pension company and has £153K of carry forward allowance to use up over the previous 3 years.
I said the most efficient way would be take the 30K tax free now and to ask the employer to put the rest (£150K) in his DC pension if he can afford to leave it there for a few years until age 55/57.
But we were wondering would he have an issue with annual threshold (£200K max) or adjusted income (£260K max) that would throw a spanner in the works ? apparently no other sources of income, or are these redundancy numbers just low enough to be under ??
If he just takes the lot now I reckon it would cost him ~70K extra in tax !!
I had this with slightly lower numbers, the company wouldn’t/couldn’t do it as the payment wasn’t made until a few days into the new tax year (final day of work was old tax year)……which worked for me nicely.
1st £30k is (should be)tax free, then £12.5k taken to use up my personal allowance (no intention of working in the new tax year and no other income), dumped the remainder (that was taxable) into a freshly opened SIPP (provider added 20%), I then submitted my self assessment and got the other 20% back from HMRC (eventually!).
Works well and satisfying to see the tax take reduced significantly
Jim
1st £30k is (should be)tax free, then £12.5k taken to use up my personal allowance (no intention of working in the new tax year and no other income), dumped the remainder (that was taxable) into a freshly opened SIPP (provider added 20%), I then submitted my self assessment and got the other 20% back from HMRC (eventually!).
Works well and satisfying to see the tax take reduced significantly
Jim
BikeBikeBIke said:
Statutory is about 16 grand, are they really going to give him over 10x the bare minimum? (I hope they do!)
Looks like it so far, also those figures include a PILON payment of about 15K but they won't salary sacrifice that into the pension. It's all being paid at the end of the financial year so will be on top of a years salary - but presumably nothing stopping him putting the PILON into a pension himself and doing a tax return to get the relief. BikeBikeBIke said:
Statutory is about 16 grand, are they really going to give him over 10x the bare minimum? (I hope they do!)
Happened to me 20 years ago when I was offered early retirement/redundancy. The company redundancy plan was 2 weeks pay per yearof service + PILON (3 months pay) and I worked there for 33 years. And that was only part of a very generous deal!
R
TownIdiot said:
Don't forget that he needs them to get the money out of the pension
So 25% is tax free
The rest will be subject to income tax
So there is a saving but it's not the whole amount
If he's retiring from work completely, if 52 now, then he might sneak into the 55 y/o bracket for drawing on it. He can then take £12570/year tax free from the 75% taxable portion of his pension, until state pension kids in at 67. That's another £150,840 out tax free, over and above his 25%.So 25% is tax free
The rest will be subject to income tax
So there is a saving but it's not the whole amount
TwigtheWonderkid said:
If he's retiring from work completely, if 52 now, then he might sneak into the 55 y/o bracket for drawing on it. He can then take £12570/year tax free from the 75% taxable portion of his pension, until state pension kids in at 67. That's another £150,840 out tax free, over and above his 25%.
Nail on head, just scrapes in to retire at 55 - and I believe his pension pot stands at £550K now with the redundancy in it, meaning he could potentially take out £137K tax free at 55 with his 25% allowance (in todays numbers) and if the pot grows at 5% over the next few years should be able to get more than that £150K back as a lump sum.TownIdiot said:
Doesn't seem like much of an income to see him through the next few years.
He'll have to live off savings or some other income (spouse's income?) until 55 but from 55 he'll have £12570/year tax free and he can top that up from his 25% tax free lump sum. Or better still, work out what he needs (say £2500/month) and ask the pension co to pay him £1047.50 a a month from his 75% taxable portion and £1000 a month from his tax free allowance. So £2500 a month and no tax payable.Dan_The_Man said:
TwigtheWonderkid said:
If he's retiring from work completely, if 52 now, then he might sneak into the 55 y/o bracket for drawing on it. He can then take £12570/year tax free from the 75% taxable portion of his pension, until state pension kids in at 67. That's another £150,840 out tax free, over and above his 25%.
Nail on head, just scrapes in to retire at 55 - and I believe his pension pot stands at £550K now with the redundancy in it, meaning he could potentially take out £137K tax free at 55 with his 25% allowance (in todays numbers) and if the pot grows at 5% over the next few years should be able to get more than that £150K back as a lump sum.To get the tax relief on his contribution he still needs to have earned at least as much in the current tax year as the total he wants to pay in, doesn't he?
Edit Ignore me! I thought the discussion was around how he could benefit from tax relief in the way in, not the way out.
Edited by PorkInsider on Monday 10th March 19:57
PorkInsider said:
Dan_The_Man said:
TwigtheWonderkid said:
If he's retiring from work completely, if 52 now, then he might sneak into the 55 y/o bracket for drawing on it. He can then take £12570/year tax free from the 75% taxable portion of his pension, until state pension kids in at 67. That's another £150,840 out tax free, over and above his 25%.
Nail on head, just scrapes in to retire at 55 - and I believe his pension pot stands at £550K now with the redundancy in it, meaning he could potentially take out £137K tax free at 55 with his 25% allowance (in todays numbers) and if the pot grows at 5% over the next few years should be able to get more than that £150K back as a lump sum.To get the tax relief on his contribution he still needs to have earned at least as much in the current tax year as the total he wants to pay in, doesn't he?
Edit Ignore me! I thought the discussion was around how he could benefit from tax relief in the way in, not the way out.
Edited by PorkInsider on Monday 10th March 19:57
TwigtheWonderkid said:
It is. It got derailled by someone talking about tax on the way out, which I added to.
Ah ok.In that case, OP, my point still stands that your friend needs to have have had taxable pay of at least the total he wants to pay into his pension in the year he actually makes the contribution in order to claim tax relief on it.
Carry forward of remaining unused allowance from previous years doesn't apply to tax relief.
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