Reader Q: Can I put my redundancy payment into my AVC & take the lot tax free?
Reader Question 1):
I have asked my company if I can split my redundancy ,£30000 tax free with the surplus to be used to top up my pension. The pensions dept have stated that this can be done, however it would have to be invested as an AVC. Is this correct as I would then not be able to cash this as a lump sum as I wish to do with my pension.I will be 55 in Oct 2012.
Reader Question 2):
Having read your reply to split redundancy with a lump sum put into a pension. I have asked my pensions dept if I can do this, they have answered that It can (quote) 'go into an AVC'. If this is the case I would not be able to claim this as lump sum from my pension. Is this answer true ?
If you have a final salary scheme then an Additional Voluntary Contribution is a means of topping up your pension benefits (although schemes do not have to offer an AVC). In my article 'How can I avoid paying tax on my redundancy?' I highlight how people can save tax on their redundancy by using a pension:
'one way to avoid tax on a redundancy payment is to have some of it paid into a pension. That way you could reclaim the income tax and the gross amount could be used to fund your retirement. But the major downside of this is that your money is locked up in a pension until you are age 55.
Under current rules you could then only take 25% of the pension fund as a tax free lump sum while the rest would have to provide you with a retirement income. There are odd exceptions to this rule such as the ‘pension triviality’scenario. However, pension rules are changing which will give people greater access to their pension fund. If you want to explore the pension route further then take financial advice as the legislation/proposals are a bit of a minefield.
Obviously there are limits to how much you can pay into a pension in any event, although you could technically pay into one on behalf of a spouse or child and claim a limited amount of tax relief.'
So whether it is via an AVC or a personal pension you can only access your pot when you hit 55 at the earliest. Even then you can't necessarily just take out the money as cash as stated above.
However, some schemes allow members to take 100% of their AVCs as tax free cash where the amount in the AVC is less than 25% of their overall scheme tax-free cash entitlement. If your scheme doesn't allow this then unfortunately there is not much you can do. Using a pension to avoid tax on redundancy does have its limitations as you are working out. But in some instances the benefits are significant. Seek professional advice from a pensions specialist which your employer should hopefully provide access to as part of your redundancy process.
I hope that helps.
I have asked my company if I can split my redundacy ,£30000 tax free with the surplus to be used to top up my pension.The pensions dept have stated that this can be done ,however it would have to be invested as an AVC.Is this correct as I would then not be able to cash this as a lump sum as I wish to do with my pension.I will be 55 in Oct 2012.
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