Redundancy payment - what's best option for me?

[WHIP IT!]

Redundancy payment - what's best option for me?
Hi, I'm about to come into a few quid from a redundancy payment.

I'm in my pensionable (Direct Contribution scheme or something. We put in X amount and company matches it) job less than two years. This, apparently means that I can't claim the company's contribution, although that's not the issue really, it's a small amount as I'm not there long...

If I was to 'cash-in' the whole lump sum, I'd lose alot in tax, 43% or something. Obviously I would like to minimise that in any way possible. Thing is, all this stuff goes right over my head...

Apparently, I can take the tax-free amount as a lump sum and put the rest in the same pension fund...

I think the pension fund is invested on our behalf in some way... I'm not really sure...

What is the best thing to do? It's supposedly a good pension, would I be mad to give it up? It seems the best of both worlds that way - a nice few quid now, and a nice few quid put away for a rainy day...

I would like to pay the least amount of tax possible.

 

[Homer]

Hi Whip It

If I understand your posting correctly, what you are saying is as follows:

1. You have been offered voluntary (?) redundancy by your current employer.
2. You have less than two years' service and will lose the value the employer's contributions under the company's defined contribution pension scheme. [Have you double checked that this will definitely happen? Some pension schemes waive the two year vesting period in cases of redundancy]
3. You have been given the option of diverting part of your severance payment into the pension scheme in order to avoid/reduce tax on the severance payment.
4. You are looking for advice on what you shoould do.

Assuming I've got that right, the first issue that needs to be clarified is whether you have an option to refuse the redundancy payment and stay with your current employer. If so, you need to consider a number of issues, including:

• How much is the redundancy payment compared to the accumulated value of the employer's contributions in the pension scheme that you would be losing if you accept the redundancy package?
• What are you chances of finding alternative employment and how long are you likely to be out of work before finding another job?
• Will you have to accept a reduction in pay in order to get a new job?
• If you refuse the offer and a number of other people leave, what is the place going to be like to work for after a number of people have gone under the voluntary redundancy program?
• If the company is in difficulties, is there a danger you could leave with less money/nothing in a few months time if you turn down the current offer?

If, after considering the above questions, you decide to accept the offer, or if you have no choice but to accept the offer, you still need to consider whether you should divert some of your severance payment into the pension scheme.

This is a complex question depending on a number of factors including:

• your age,
• the extent to which you have already built up pension entitlements,
• the amount available under the severance program,
• the amount that would be taxable and
• your overall tax position (including your average tax rate for the last three years, which will determine the net rate you pay on the taxable element of your severance payment after you have claimed top slicing relief).

If you can provide further details, it may be possible to provide some additional guidance. However, you may need to talk directly to a professional adviser in order to be in a position to make an informed decision. You should ask your employer whether and to what extent they are prepared to make such advice available to you. Please bear in mind, however, that someone engaged by your employer to provide such advice may not necessarily be entirely independent in providing advice to you on what you should do in this situation.

Regards
Homer