View more on these topics

Case study: Making the most of a redundancy payment


The problem: Roy was a made redundant from his job as a senior manager in March.

His severance package included a large redundancy payment of £105,000, making £75,000 of it taxable. Additionally, he was given additional pension service in the defined benefit scheme which saw his annual allowance usage spike last year.

He had already secured another well paid position in another company which will pay an income of £150,000 this tax year. His new employer does not have its own pension scheme but will make a contribution of £25,000 per year to his personal pension.

As he did not need the redundancy payment immediately and and because of the additional rate tax liability on a large part of his redundancy payment he was keen to pay it into a pension.

His previous pension scheme have confirmed his previous pension input period had been aligned to tax years and his inputs were £75,000 for 2012/13, £35,000 for 2011/12 and £30,000 for 2010/11.

From this he concluded that as his annual allowance for this tax year is £50,000, and as new employer is making a £25,000 contribution this year, so this gives an unused allowance this year of £25,000 (£50,000 – £25,000), and carry forward of £10,000 (£150,000 – £75,000 – £35,000 – £30,000) and has started off his new personal pension with a £35,000 gross contribution.

His new provider has advised him that his PIP end date has by default ended on 5 April 2014 so his contribution is tested against the 2013/14 annual allowance.

He comes looking for advice on what to do with the remaining £40,000 of his redundancy payment.


The solution: He would like to put the remaining £40,000 of his redundancy into his pension plan but did not think he could.

Roy has relevant earnings of £225,000. This is important as he can only pay 100 per cent of his relevant earnings in a tax year, regardless of how much annual allowance he has available.

For annual allowance purposes, what is measured is the total pension input amounts in a PIP. As Roy’s schemes have both got PIPs that run in tax years that has made things simpler.

Roy has not got his carry forward calculations correct.

Carry forward is used to remove or mitigate any tax liability where a scheme member’s total pension inputs exceed the standard annual allowance in a tax year.

This is done by going back three years and offsetting any excess against the unused allowance from that year and then going on a year if necessary until:


– the unused allowances are used up, which leaves a taxable excess, or

– until the excess is removed.


Roy only had the last three years information so assumed the £25,000 excess used up most of the £35,000, leaving £10,000 carry forward available for 2013/14.

You go back to Roy’s previous scheme and get the information for 2009/10 and prepare a schedule of inputs for Roy.


  2009/10 2010/11 2011/12 2012/13 2013/14 2014/15

Annual Allowance







Pension Inputs







Unused (Excess)







Used up in 2012/13







Unused for 2013/14







* new employer contributions


The £25,000 excess in 2012/13 was fully offset against the unused allowance from 2009/10 which was three years before 2012/13, leaving the unused allowances of £35,000 from 2010/11 and 2011/12 fully available for use in 2013/14.

The maximum allowance in 2013/14 is £85,000 and Roy’s new employer and his own contribution comes to £60,000.You advise Roy that he can make a further contribution of £25,000 gross.

You then explain that even though his PIPs run in tax years these can sometimes be manipulated to suit clients’ needs.

His new personal pension provider allows clients to nominate their own PIPs so when he pays his extra £25,000 you get Roy to nominate that his PIP ends the following day.

His nomination means a new PIP starts which must end in the 2014/15 tax year. As the annual allowance is falling to £40,000 next year Roy can pay the final £15,000 into the new PIP. This will be paid in 2013/14 for tax relief purposes but use up the 2014/15 annual allowance as the PIP ends in that tax year.

By having a deeper understanding of the carry forward rules and knowledge of how to make use of PIP flexibility to best suit a clients’ needs, Roy’s adviser has allowed him to achieve his objective of getting all his redundancy payment into his pension plan.

Les Cameron is a technical manager at Prudential 



US equities fall over debt ceiling concerns

US stockmarkets fell and the dollar dropped to an eight month low yesterday over growing concerns of the economic effects of the stand-off over the US budget. The S&P 500 and Dow Jones indices both finished the day down 0.9 per cent, while the Nasdaq fell by more than 1 per cent. The dollar fell […]


Bluefin sets aside £7.3m towards Ucis misselling review

Bluefin Advisory Services has set aside a total of £7.3m to cover liabilities including the cost of investigating whether its advisers missold unregulated collective investment schemes. The advice firm’s accounts for 2012, published on Companies House last week, state: “Provision has been made for commitments in connection with the sale of Bluefin Corporate Holdings Limited […]


FCA censures death bond firm Catalyst and seeks to fine directors £550k

The FCA has censured Catalyst Investment Group for “recklessly misleading” investors when promoting bonds issued by Luxembourg-based life settlement vehicle ARM Asset Backed Securities. Catalyst has been censured as it is in default and is unable to pay a fine. The FCA would have otherwise imposed a penalty of £450,000. The FCA is also seeking […]


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm