As Covid pushes more people into redundancy, those aged over 55 are being urged to consider putting their payouts into a pension to boost savings.
According to a briefing from provider LV, putting all or part of a redundancy payment into a pension could help savers top up their pots and benefit from savings of national insurance contributions and tax relief.
The first £30,000 of a redundancy package is tax free but payments above this are subject to income tax and an employer national insurance contribution of 13.8 per cent.
When people are made redundant, their holiday entitlement and notice period is also taken into account and tax and national insurance is deductible on these specific earnings.
Therefore, LV said it could be worth taking the first £30,000 tax free and then asking the employer to add holiday pay, pay in lieu of notice and redundancy of more than £30,000 into a pension.
The provider said the “redundancy sacrifice” works in the same way as salary sacrifice and allows the taxable element of a redundancy package to be exchanged for additional payments into a pension, which results in savings for the employer and employee.
David Stevens, director of savings at retirement at LV, said: “Covid-19 is having a huge impact on the world’s economies and large numbers of people are facing redundancy.
“Where possible, ask for the taxable element to be paid via redundancy sacrifice and see if the employer will pass on part or all of their Class 1A NI savings.
“Any part of the settlement that qualifies for the £30,000 tax free allowance should be taken directly and only used as a pension contribution to a relief at source scheme where the member has sufficient earnings elsewhere. For most, seek financial advice.”
According to one example, a saver could turn £18,200 of a redundancy settlement into a £21,000 pension contribution using this method.
Tim Morris, independent financial adviser at Russell & Co, said it would make sense to save redundancy money but often it depends on the circumstances.
Mr Morris said: “At age 55, they wouldn’t be giving up access to the money, so if they were in a financial position to start drawing their pension, this could prove a welcome boost to their retirement pot.
“If someone is confident of moving easily and quickly into a new role, this could also make sense.
“If someone wants a break from work or to train for a new line of work, taking the money could be more beneficial.”
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