Using your redundancy payment to boost your pension savings

Your redundancy payment may be used to offset tax and improve your retirement savings. 

Being made redundant can be a significant disruption to your routine, finances and long-term plans. It can be difficult to navigate the best ways to manage your finances, especially if you have received a sizeable redundancy pay package.

However, with the right professional guidance, a redundancy payment may provide an opportunity to boost your retirement savings and mitigate a high tax bill.

In this blog we will cover how you can optimise your redundancy pay, reduce your income tax and boost your retirement funds.

Redundancy payment breakdown

Your redundancy package can often include payments that are separate to redundancy pay such as bonuses, holidays and overtime. It is the nature of these payments and what they are for which affect how they are taxed.

If you are made redundant, your employer should provide a detailed breakdown of your payment in full, distinguishing between:

• Redundancy pay – made in connection with the termination of employment.
• Other payments (i.e. bonus, holidays) which would be taxable as earnings.

The first £30,000 of your redundancy payment is tax-free, meaning it isn’t included in your usual earnings and therefore not subject to income tax. Anything over the £30,000 threshold will be liable.

Your redundancy pay is free from National Insurance Contributions (NIC) even if over the £30,000 threshold. However you will be liable pay income tax and NIC on other elements of your redundancy package such as bonuses and holiday pay.

How much of my redundancy can I contribute to my pension? 

Before you contribute any of your redundancy pay into your pension, you should first assess how much of this may be needed to live off in the short term. A financial planner can work with you to assess your current circumstances, understand your longer-term goals and advise you on distributing your funds.

You can only contribute the parts of your redundancy payment that qualify as ‘relevant UK earnings’. Generally, the first £30,000 of your redundancy payment does not qualify as relevant UK earnings and therefore cannot be contributed to your pension. Any money above the £30,000 threshold does usually qualify as earnings.

What are the benefits of paying some of my redundancy into my pension?

The main benefit is significantly boosting your retirement provision. A boost of funds into your pension could help to protect your financial future and bring you closer to achieving your retirement objectives. A financial planner will work closely with you to understand your goals and put realistic steps in place to reach them.

You can also reduce your income tax liability when you put some of your redundancy pay into your pension. If you enter into new employment after being made redundant you may find you earn a significant amount in that individual tax year. This may push you into a higher tax bracket, resulting in lost allowances and benefits or increasing the effective rate of tax for that year.

For example, if you have taxable earnings exceeding £100,000, this will result in your tax-free personal allowance tapering commonly known as the ‘60% tax trap’. By making a pension contribution, you can effectively avoid falling into these higher tax brackets.

How can a financial planner help me optimise my redundancy pay?

Redundancy can often mean a significant upheaval in your life’s routine. High emotions can impact decision making, particularly around complex taxation and pension planning. A financial planner can take a holistic view of your circumstances and help to guide you through the emotions you may feel during a redundancy.

Redundancies can differ depending on your employer and your employment contract. With no ‘one size fits all’ redundancy, it’s important to consult a financial planner to receive bespoke advice based on your unique situation. They will be able to review your circumstances, goals, needs and retirement expectations and offer the most suited solutions available, helping you to get the most out of your redundancy pay.

If you have recently been made redundant and are considering what to do with your payment, please get in touch with our team of professional advisers.