Tax treatment depends on your circumstances and is subject to change
Being made redundant is generally a stressful and worrying time. And while managing day-to-day finances and finding a new job will no doubt be top of your list, it helps to know where you stand with the rest of your financial commitments, including your pension.
How redundancy affects you and your workplace pension very much depends on what type of scheme you have.
It’s very likely your workplace pension will fall under one of the following two main categories (if you are unsure which relates to you then ask your pension provider).
The income you receive from this type of pension depends on how much you have contributed over the years and how well the pension investments have performed.
This type of pension promises to pay you a guaranteed income in retirement, based on how long you have worked for the company and your salary.
While being made redundant might affect what contributions you can make to other pensions you have, it shouldn’t have any other impact.
Keep your pension as it is
Even though you and your employer will no longer be contributing to the scheme on your behalf, you can keep your final salary workplace pension as it is. Then, when you reach the scheme’s set retirement age, you will be entitled to pension benefits. This is often a very sensible option because the benefits will be guaranteed for the rest of your life. What these benefits look like will depend on the specific rules of your scheme, how long you worked for the company and your salary.
Transfer your pension to a new scheme
When you are made redundant you can find out how much your pension benefits with this scheme would be worth in pounds and pence if you transferred to a personal pension. You could then choose to close your final salary scheme and transfer this money into a new or existing personal pension. This personal pension could be a new employer’s workplace pension if the scheme’s rules allowed it.
Take early retirement
Depending on your age, your employer might offer you early retirement as part of your redundancy package. In exchange for reducing your pension benefits, including the size of your guaranteed income, you could then begin withdrawing your final salary pension. This is very much a personal decision and depends on what financial commitments you have and any other income you are receiving. If you have a lot of commitments that are due to run for a few more years, then early retirement might not be the best option. On the other hand, you might be able to make the most of this option even though it means giving up a portion of your guaranteed income. It wouldn’t prevent you from taking other paid jobs and for a lot of people this gives them the freedom to explore new careers, passions and working habits.
Keep your pension as it is
As with a final salary scheme, even though your employer will no longer be contributing to the scheme on your behalf, you can keep your personal workplace pension as it is. In some cases, you can even choose to carry on making contributions.
Transfer your pension to a new scheme
You could transfer your savings into a new employer’s workplace pension, depending on the scheme’s specific rules. Or, you might decide to transfer these savings to another personal pension scheme: either one you currently have or a completely new scheme.
As the rules currently stand, you need to have 10 qualifying years on your National Insurance record to receive the minimum State Pension. And you’ll need 35 qualifying years to receive the maximum amount.
So, if redundancy affects your National Insurance qualifying years then it could also affect the amount of State Pension you receive. Although, there are ways to make up any gaps in your National Insurance record.
In most cases it makes sense to keep any final salary pension as it is, even if you have been made redundant. Even though no further contributions will be made (from you or your former employer), you should still receive a guaranteed income from this pot at a specified age.
The golden rule is: have a chat with a financial adviser before making any final decisions. Once you transfer out of a final salary scheme you cannot transfer back in. So, you want to be absolutely sure of the decision you make before potentially giving up a guaranteed income for life.
Your old workplace scheme might be in great shape, with low charges and a great history of growth. In this instance it could make sense to leave your pension as it is. However, in many cases it’s worth comparing your old workplace scheme with any existing personal pensions you have, or shopping around for a new, modern scheme because you could be getting:
Alternatively, if your new workplace pension is in good shape and allows transfers in, then that could be an option. Combining pension pots can also reduce charges and make it easier for you to keep track of your savings. That means less admin for you!
We can help you to make the best possible decisions when it comes to your pension.
Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.
