View more on these topics

The sum of redundancy

I have been made redundant by my employer and they are paying me a lump sum in compensation. Will I pay tax on that money? I am a member of the firm&#39s final-salary pension scheme and they have calculated a pension payable to me immediately, how can I be sure it is the correct amount? They say they have not reduced it for early payment what do they mean?

I am sorry to hear you have been made redundant from your job. This affects different people in different ways. Remember, it is the job that is redundant, not the jobholder. After the initial shock, many people find it, strangely, a positive experience. After all, you now have the opportunity to rethink your working life.

The redundancy payment you receive may well be tax-free. If it does not exceed £30,000, then it will be free of income tax and National Insurance. Amounts over £30,000 are treated for tax purposes as income and can be taxed up to 40 per cent.

What you do with that money will depend upon your personal financial circumstances. You may want to use it to supplement future income while you search for new employment or possibly invest it. Some people use the capital they receive from redundancy to start in business on their own and that may be a goal you have set for yourself.

The amount of pension income payable to you will depend upon a number of factors. The first will be associated with the length of time that you were employed by the company. Pension schemes tend to use old-fashioned language and may well talk about your length of “service” but what they mean is employment.

The scheme will have an accrual or build-up rate of benefits. This is usually expressed as a fraction and this might be typically 1/60th for each year of employment. It is a fraction of your “pensionable salary” and it is important to look at the scheme definition of this.

I have just examined one scheme booklet which defines pensionable salary as basic salary for the 12 months at the last April 1. If you have therefore had a pay rise since then, the increase will not produce any extra pension.

Many schemes exclude any variable earnings that you may have, such as overtime, bonuses or commission payments. So, armed with this information, you might be able to check the pension figure that has been quoted to you.

If you were not taking the benefits immediately, this pension will be your deferred or preserved pension and can be expected to grow between the date of leaving employment and your actual retirement.

Many schemes calculate the pension payable by reference to the exact length of time you have been employed taking into account years, months and days of “service”.

You should, of course, ask for the details of the pension figure quoted to you to be confirmed in writing.

You suggest you could start to receive the pension income immediately and that the scheme is not reducing it. Where an employee takes early retirement, usually before age 60, very often, their pension payment is reduced simply because it is going to be paid to them for a longer period.

The fact that yours is not going to be reduced is very positive. Some early retirement penalties can be quite severe.

You may also be able to commute (give up) some of the pension in return for a tax-free cash lump sum and you may want to consider doing this. If you do so and then invest the capital to generate income you will need to consider the rate of growth that you need to achieve to replace the pension income you have given up. You should also take into account future increases to the pension that the scheme might provide.

Remember that the pension income you receive is taxable income and will be added to all other sources of income to determine the tax rate.

You may well be able to invest tax-free cash in an environment which produces tax free or tax-beneficial income. If you do decide to take some of the benefits in the form of a tax-free cash lump sum, that should not reduce the amount of the pension payable to your spouse in the event of your death.

Recommended

Channel Islands&#39 plan to offer captive PI for £3k

Cambridge-based IFA Group 300 is setting up a professional indemnity insurance scheme based in the Channel Islands.The captive scheme will be offered to 200 firms initially – Group 300 members and a restricted number of firms which do not belong to the network. The company is aiming for FSA regulation in January.Appointed representatives will pay […]

A dedicated follower of fashion

IFA Hazlems Financial will be offering free financial advice to designers and visitors at the London Designers&#39 Exhibition, which is part of London Fashion Week.Every exhibitor will get a welcome pack from Hazlems Financial inviting them to arrange a free initial consultation with an adviser specialising in the fashion sector.This is the second time that […]

Put your clients first to succeed

I can&#39t help despairing over product providers, networks, and some IFAs as to whether they will ever learn the most important lesson of running a business – look after your clients and they will look after you.IFAs are continually criticised for poor advice but I suspect that this normally only tends to happen when the […]

Shepherds offers WP bond converter with 9.8% yield

Shepherds Group is offering a with-profits bonds converter that it says will provide annual returns of 9.82 per cent.It says there are thousands of investors who need to draw an income but are stuck with a poorly performing with-profits bonds and are unable to make an exit because of a market value adjuster.Investors who surrender […]

Certification guide

Guide: how to… certify your pension scheme

Certification is highly complex and surrounded by a minefield of information and auto-enrolment jargon, which can make it very difficult to understand. However, for many employers it is a necessary process that must be executed successfully.

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment