What happens to my pension if I am made redundant?
We are still dealing with the effects of the corona virus pandemic. For the first time since the 2008/09 Financial Crisis redundancy rates have risen and that trend looks set to continue throughout 2023. Whilst redundancy rates have declined since the peak of 2020, the Office for National Statistics (ONS) revealed that in the most recent quarter redundancy rates have increased from 2.8 to 3.3 per 1,000 employees. With the cost-of-living crisis raging on, a rise in the use of automation and artificial intelligence, the stark reality of the UK economy means that further redundancies are unavoidable.
When faced with significant life changes like redundancy and the subsequent options of finding a new job or retiring early, it can be challenging and bewildering to figure out the best course of action. If you encounter redundancy, what factors should you take into account when considering your pension?
What happens to my pension if I am made redundant?
If you are thinking about what redundancy means for your pension savings, the good news is that any pension you have built up is still yours, and you do not lose any part of it due to your change in circumstances. However, any contributions made by your employer into your pension will stop. Whether you can continue making personal contributions will depend on the type of Pension you have – which we will explore later.
In addition to your workplace pension, you might have been building up your State Pension or accumulating other pensions, like a Self-Invested Personal Pension (SIPP), which are not impacted by redundancy. However, it is important to note that if you experience a work hiatus due to redundancy, your State Pension credits will cease until you resume employment or start receiving eligible benefits, like Job Seekers Allowance.
What type of pension do you have?
The type of pension you have will largely determine what options you have post-redundancy. In the UK there are two pension scheme types:
- Defined Benefit (DB) - also known as a final salary pension.
A DB pension is an occupational pension scheme that provides a promise of income for life at retirement, sponsored by the employer, and typically determined by the number of years you have been employed by the company.
- Defined Contribution (DC) – also known as a money purchase pension.
A DC pension can be either an occupational pension scheme provided by an employer or an individual scheme funded by the member (and can also be added to by the employer). With this type of arrangement, benefits at retirement will be dependent on the level of contributions made by the member (and employer) and investment returns on those contributions.
What are the options?
The options you can consider when thinking about what to do with your pension from your previous employer will depend on the type of pension you have:
1. All DB schemes are occupational pension schemes, so directly linked to your employment and typically, the years you have been employed. What this means is that your benefits will stop building up at the point you leave the company.
The options for these pensions are:
You can choose to leave your accrued benefits in the scheme – also known as preserved benefits - and wait until you reach the scheme’s specified retirement age before you start to take your pension benefits. Should you wish to retire early, it may be possible to do so, depending on the scheme rules. However, it is important to note that your benefits will be reduced as the pension will need to be stretched over a longer period of time. Conversely, there is a possibility that you can keep your benefits within the scheme even after reaching the standard retirement age and choose to postpone receiving them. Please note that DB schemes often impose a maximum age requirement for benefit withdrawal, typically around 75 years.
Alternatively, you may wish to transfer to a new defined benefit arrangement.
- If you are a member of a funded public sector scheme, for example, The Local Government Pension Scheme (LGPS), you can transfer your pension to another scheme. This can be done through what is known as, The Transfer Club, and is specific to the transfer of public sector schemes.
- If you are a member of a private sector pension scheme, while it may be possible to transfer your benefits to another defined benefit arrangement, it’s likely to be difficult as these schemes are increasingly less common.
Finally, your last option would be to request a cash equivalent transfer value and transfer your benefits into a personal pension – you will need to seek the advice of a financial adviser if you are considering this option.
2. DC schemes can be both occupational and personal pensions.
Akin to a DB scheme, if your DC scheme is an occupational pension, then you are unable to continue making contributions after you leave your company’s employment. And the options are as follows:
- Leave the funds in the scheme, and wait until you reach at least the minimum retirement age of 55 (increasing to 57 in 2028), and start taking benefits.
- Or, you could transfer your pension into a new pension scheme which could be either a personal pension scheme, or into the workplace pension of your current employer, if you have started working again.
For members of a group personal pension or stakeholder DC pension scheme, there are more options available:
- As this pension is linked to you as opposed to your employment, your employer will stop making contributions but you can continue to do so. Just ensure that you contact your pension provider directly to re-establish your contributions.
- Similar to the above, you can leave the funds in the scheme and wait until you reach the minimum retirement age to begin taking benefits.
- Or you could transfer to another pension, for example an existing pension, or into the workplace pension of your current employer if you have started working again.
How can you access your pension?
Based on current legislation, you are only able to access your pension from the minimum pension age of 55 (increasing to 57 in 2028), there are very few exceptions to this rule, and redundancy does not fall into that category.
Whilst this is the general rule, typically, DB schemes will have a scheme specific age which will be the minimum age that you can access your pension benefits without penalty.
Can you put redundancy money into a pension?
In short, yes you can, and it can be quite tax efficient to do so as any redundancy payment over £30,000 is taxable as income tax. Should you wish to contribute into your pension using your redundancy payment, you should also be aware that there is a maximum amount that you can contribute with tax relief applied known as the Annual Allowance. For the current tax year (2023/24) the maximum you can contribute is £60,000. If you have not used all your Annual Allowance in the previous three years, then you may be able to carry forward those unused allowances to this year, allowing more than £60,000 to be contributed in one year. Please note that if you’re under 75, you’re eligible to pay in up to 100% of your UK relevant earnings or up to £3,600 gross, whichever is higher, and receive tax relief on your contributions. However, only the redundancy payment over the tax-exempt threshold of £30,000 will be classed as employment income and therefore count as relevant UK earnings.
There are two ways of doing this:
- You can use part of your redundancy payment to make a pension contribution.
- Or, should your employer agree, you could give up some of your redundancy payment as an employer contribution known as a ‘redundancy sacrifice’.
Example: Redundancy sacrifice pension
Samantha has earned £60,000 in this tax year and has been made redundant. She has accepted a redundancy package of £35,000 and wants to consider her options in terms of pension contributions.
As the first £30,000 of her redundancy package is paid tax-free there would be no additional benefit for her employer to make this pension contribution on her behalf, as she would not receive tax relief from an employer pension contribution.
The surplus above the first £30,000, i.e. £5,000 would be subject to income tax however, at her marginal rate. Therefore, should her employer agree to sacrifice this into her pension, there would be no tax due, giving her a tax saving of £2,000 as she is a higher rate taxpayer.
It is important for Samantha to also consider any other pension contributions she has made in the tax year to ensure she does not over-contribute and have an annual allowance charge. If Samantha is unsure, she should seek the advice of a financial adviser who could guide her.
How can we help?
If you have been made redundant, or are in the process of being made redundant and you are unsure of what course of action to take with your pension, get in touch with one of our advisers who will be happy to help. We’re currently offering anyone with £100,000 or more in pensions, savings and investments a free retirement review worth up to £500.
Investments and the income derived from them can fall as well as rise and you may get back less than you originally invested.