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Redundancies and retirement – is your pension your last lifeline?

We take a look at what options you have, if you’ve been forced to dip into your pension as a result of being made redundant.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

For the first time since the 2008 financial crisis, the UK has officially entered another recession.

During the darkest days of 2008, the economy shrank by 2.2% in the final quarter of that year. Yet in the second quarter of this year, it contracted a mammoth 20.4%. As the UK economy struggles, redundancies are likely to become more frequent over the coming months.

In fact, estimates from the Office for National Statistics have revealed that the number of payroll employees fell by 730,000 between March and July this year. Those are some pretty big numbers and things could still get worse with the furlough scheme stopping in October.

This article isn't personal advice. If you're unsure whether a course of action is right for you, please ask for advice. Pension and tax rules can and do change and any benefits will be dependent on your own circumstances.

Over 50s hit hard by the recession

A recent study showed that a quarter of a million over 50s could fall out of work because of redundancies during the pandemic. It highlights that because job schemes and recruitment are skewed in favour of younger workers, older staff could be far less likely to return to work after a redundancy.

This could have a significant impact on lots of people’s retirement savings. Depending on whether they have savings elsewhere and how far they are from State Pension age, over-55s could well be tempted to raid their pensions if they struggle to return to work.

Ways to access your pension if you have no other option

The purpose of a pension is to house your savings and give you an income in retirement. And if you withdraw money from your pension too early, you could end up running out of money to live off in later life. But if your pension is your only lifeline, here’s what to consider.

You can normally take up to a 25% tax-free lump sum from your pension from age 55 (rising to 57 in 2028). But you should only consider taking as much as you need, to tide you over. Remember, you don’t need to take your tax free-cash in one go. You can choose to take only a portion of your tax-free cash entitlement at a time through either phased drawdown or multiple lump sum withdrawals.

What you do with your pension is a very important decision, and one you shouldn’t make lightly. If you’re 50 or over we’d suggest getting in touch with the government’s free Pension Wise service for guidance on the type of pension you have and your options. If you’re still not sure what’s right for you, you could consider getting personal advice.

Phased drawdown explained

Let’s say you had a pension pot worth £100,000. Instead of accessing your whole pension, you could decide to access just £20,000 of it using drawdown. Up to £5,000 (25%) of that portion can normally be paid to you as a tax-free cash lump sum, and the rest (£15,000) is moved into a drawdown account. You can then make taxable withdrawals from that £15,000 as and when you need to.

The £80,000 of your pension which you haven’t accessed stays where it is with the potential to grow. You can then move more money into drawdown when you actually retire, or earlier if you need to. Remember if you choose this option, your pension stays invested and your income could reduce or even run out if your investments don't perform as you hoped.

Cash lump sum withdrawals explained

You can also choose to take a lump sum (UFPLS) payment from your pension. 25% of the lump sum will normally be tax free and the rest is taxed as income. Let’s say you took £10,000 as a lump sum. £2,500 would normally be paid tax free and £7,500 would be added to any other income you’ve received in the tax year and taxed at your marginal rate.

The restrictions you need to watch out for

Most people can pay in up to £40,000 in total into their pensions each tax year. This is called the annual allowance. It includes payments made by you personally, or on your behalf by employers or someone else, as well as any tax relief added by the government.

When you withdraw a taxable income from a money purchase pension, this will automatically trigger what’s known as the Money Purchase Annual Allowance (MPAA). This means future contributions into your money purchase (e.g. workplace or personal) pensions will be limited to just £4,000. If your contributions go above the limit, you’ll pay a tax charge on the excess.

This means if you choose to take a cash lump sum withdrawal (UFPLS) you’ll trigger the MPAA straight away, because part of the payment is taxable. Taking just your tax-free cash through drawdown won’t trigger this limit, unless you decide to make taxable withdrawals from drawdown too. You might not think this matters if you’re currently unemployed. But if you return to work in the future, it could have a serious impact on how much you and your employer can pay into your pension.

Guide to taking money from a pension

Learn more about the different ways you can access your pension, including how to get a secure lifetime income.

Download guide

Knowing your redundancy rights

If redundancy is on the cards, it’s vital that you know your rights. You’ll normally be entitled to statutory redundancy pay if you’re an employee and you’ve been working for your current employer for 2 years or more. And some employers can choose to give their staff extra redundancy pay if they want to.

Find out more about redundancy rights

Redundancy and paying into a pension

If you have other savings to fall back on, and you’ve been made redundant in the run up to retirement, you could think about paying some of any redundancy payout into your pension.

This could help to give it a boost before retirement. Anything you pay into a pension the government will automatically pay 20% on top in tax relief. And if you’re a higher earner, you could claim back up to a further 26% through your tax return.

To receive tax relief on your personal contributions though, you can’t pay in any more than what you earn. Any part of your redundancy package which is taxable is likely to be classed as earnings. Remember once in a pension you cannot access the fund until age 55 (57 in 2028).

More on paying into a pension

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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