What is the benefit in putting more into my pension and paying in the taxable element of my redundancy?

Gillian, firstly I am sorry to hear that your being made redundant.

If you can afford to add to your pension more between now and May 2022, it would boost the assets you have for retirement. You would benefit from tax relief on your personal contributions. For every £80 paid to your pension, you will receive tax relief of basic rate at source, increasing to £100 gross. If you are a higher rate taxpayer, you can claim back an additional 20% or 25% for additional rate taxpayers, via your self-assessment. In Scotland, this is an 1%, 21% or 26% dependent on your marginal rate of income tax. It is a very tax efficient way of saving if you can afford to allocate more from your salary. With the redundancy in mind, it is important ensure you have sufficient emergency fund to cover your outgoings whilst you look for new employment or seek to draw benefits from your pension.

You are correct in saying that your employer can use part of your taxable redundancy payment to make pension contributions for you. Alternatively, if your employer agrees, you can give up some of your redundancy payment as an employer contribution to your pension known as ‘redundancy sacrifice’. The first £30,000 of a redundancy package is tax-free but payments above that are subject to both income tax and employer national insurance contribution of 13.8%. Where possible, ask for the taxable element to be paid via redundancy sacrifice and see if the employer will pass on part or all their Class 1A NI savings. You also reduce the income tax payable on the package.

As you are over the minimum access age of 55, you would not be giving up access to your money as you could start to draw from your pension pot. If you chose to access your tax-free cash only or your defined benefit pension, you would not be subject to the Money Purchase Pension Allowance (MPPA). There would be no impact on what you could save to pensions in the future. If you opted to draw from the income component of the defined contribution pension, the MPPA kicks in and reduces what you can save to pensions at £4,000 per annum.

Before taking any action with boosting pensions, consider that all contributions are within the annual allowance of £40,000 or 100% of your earnings (whichever is lower). You can carry forward unused allowances also subject to 100% of your earnings. If you are a higher earner, the standard £40,000 annual allowance is reduced by £1 for every £2 of adjusted/taxable income an individual has over £240,000.

You should also consider and calculate your total pension benefits against the lifetime allowance of £1,073,100 to ensure you are not inadvertently causing any lifetime allowance charges by boosting your pension pot.