Your pension options if you’re made redundant

Different pensions work in different ways.

So before you can decide what to do with your pension when you’ve been made redundant, you’ll need to know which type you have.

There are two main types of workplace pensions:

These pay you a retirement income based on your salary and how long you’ve worked for your employer.

Defined benefit pensions include ‘final salary’ and ‘career average’ pension schemes. Generally, these are now only available from public sector or older workplace pension schemes.

These build up a pension pot to pay you a retirement income based on how much you and/or your employer contribute, and how much this grows. These are also known as ‘money purchase’ schemes.

If you’re unsure what type of pension you’ve got, ask your employer.

It might be possible to pay part of a redundancy payment into a pension. However, there are some things to consider:

If you have a defined benefit pension, you won’t usually be able to put any of your redundancy payment into the pension but some schemes will allow you to buy 'added years'.

This is because the benefits are calculated based on how long you’ve been employed and what your salary was. How much you pay in isn’t a factor in calculating how much you get but check with your scheme to see if they will increase your benefits in exchange for you paying part of your redundancy payment as a pension contribution.

If, however, you have an additional voluntary contribution pension which is linked, or sits alongside your defined benefit pension, you might be able to make a payment into that.

If you have a defined contribution pension, it might be possible to put part of your redundancy payment into that pension. Find out more below.

You can only contribute parts of your redundancy payment that qualify as relevant earnings.

Generally, the first £30,000 is tax-free and doesn’t qualify as earnings for Income Tax or tax-relief purposes.

Any money above this usually qualifies as earnings, and therefore qualifies for Income Tax and tax relief.

Your employer must provide you with a detailed breakdown any redundancy payments.

Think about how long it might be before you get another job and how much you might need to live on during that time.

If you put money into a pension, you can’t usually take it back out again until after you’re aged 55.

You don’t have to pay the money into a pension immediately – you could wait and pay some money in later when you have alternative work.

Your employer might agree to pay some or all the taxable part of your redundancy payment into your pension on your behalf.

If they agree to this, you’ll not only benefit from not having to pay tax on the money but you could also ask them if they will add to the payment the saving they make from not having to pay National Insurance. This is known as redundancy sacrifice. 

If your employer won’t agree to this, you can arrange to pay the money into a pension yourself.

It’s also important to check with the employer and your pension provider what the options are and how the tax relief will be handled.

In some cases, the pension will claim any basic rate tax relief on your behalf, and you’ll have to claim any higher rate tax relief yourself. In other cases, no tax relief will be claimed by the scheme and you’ll have to claim all of this yourself.

If you use the redundancysalary sacrifice method the correct tax relief will be received automatically.

The Annual Allowance is the limit on how much tax-free money you can build up in your pension in any one tax year while still benefiting from tax relief.

This is based on your own contributions,  tax relief paid into the pension; any employer contributions and any contributions made on your behalf by someone else.

If you exceed the Annual Allowance, a tax charge is made which claws back any tax relief that was given at source.

The annual allowance is £60,000 for most people in 2023-24. Where you are paying the contribution yourself, you only receive tax relief up to the lower of the annual allowance, or 100% of your earnings.

For some high earners (those with income above £200,000) and those who have taken money from their pension flexibly, the allowance might be lower.

It might be possible to contribute more than your annual allowance and still benefit from tax relief by using unused allowances from the three previous tax years.

Until recently, there was also an overall limit to how much you can build up in pension benefits without having to pay extra tax charges. This was known as the lifetime allowance (£1,073,100).

The lifetime allowance is set to be abolished from April 2024. In the meantime, the lifetime allowance charge has been removed from 6 April 2023, meaning that no-one will incur the charge.

When you know what kind of pension you’ve got (see definitions above), how much you’ll need to live on, and the tax implications – you need to decide whether to leave it where it is or move it somewhere else.

If you’re made redundant, you’ll have to stop paying into it and do one of the following:

• Leave your pension in the scheme and when you retire you’ll get an income from that.
• Transfer your pension into a new employer’s scheme (if they allow you to). Unless your new job is in the public sector, it’s unlikely to offer a similar scheme.
• Transfer your pension into your own personal pension (where the transfer value exceeds £30,000, you will need to take regulated financial advice).
• If you’re old enough, you might be able to take early retirement.

In most cases, it’s best to leave your pension with the scheme. Only transfer out of the scheme in exceptional circumstances where your individual situation means this is the best decision. For example, if you’re dealing with unmanageable debt.

Has your ex-employer gone out of business (or you’re worried they might), and you’ve left your pension in their scheme?

If you’re made redundant, you have the option to:

• leave your pension where it is, to carry on growing until you retire, or
• move it to another defined contribution scheme – either one you already have, one set up by your employer if you join another company, or set one up yourself.

If you decide to leave the pension where it is, you might or might not be able to continue contributing to it. Check with your employer or pension provider.

If your employer has enrolled you in NEST (the National Employment Savings Trust), you should be able to carry on paying into it if you want to.

If you want to carry on paying in, contact NEST directly

You might be allowed to transfer your pension to a salary-related scheme with a new employer, but you’ll need to check if they’re okay with that.

It’s also important to find out how much the transfer will cost to see if it’s worth your while.

Pensions are complicated. You might want to speak to a regulated financial adviser who can talk with you about your options.