Defined Contribution Pension Options
The defined contribution pension scheme is an investment-based type of plan. You contribute from your salary annually, and those contributions are used to buy investments such as stocks, shares, or funds.
What does this mean?
This means you gain the benefits when the value of these assets increases with time – for example, if share prices rise, then you will get more money than what you contributed initially, whereas if they fall, so may your retirement pot; this is called ‘compound growth’ in finance terms. Your employer also contributes a certain amount each year (this can be up to 20% depending on their company size).
Your employee contributions typically go into a fund that invests in global equities, bonds, and other securities known as ‘a a balanced portfolio’. The idea behind this is to generate a steady income from the fund when you retire.
Defined Benefit (Final Salary) Pension Options
Think about this for a moment:
The best retirement plans in this category offer a defined benefit (final salary) pension option. This is the most generous type of plan as it provides you with a fixed monthly income based on your final pay and how long you’ve been employed.
This can be attractive if, for example, you’re starting at work and you don’t know what kind of career path awaits or what level of pay will accumulate over time. It’s also good news if you have children to support because these schemes typically provide additional benefits such as childcare vouchers that may not otherwise be available elsewhere in the UK workplace.
This is less flexible, too, as there are limited options for how much you can withdraw from it, unlike with defined contribution (money purchase) plans where withdrawal amounts depend on contributions into the scheme plus investment returns.
Here’s the deal:
If I am made redundant, this might be an option worth considering depending on my age, whether or not I have a family to support and what kind of lifestyle we enjoy now – but again, care needs to be taken when weighing up all our options.
Can You Put A Redundancy Payment Into A Pension?
Yes, you can. It is possible to put a redundancy payment into one of your existing pensions. It might even be advisable if the pensioner has other sources of income, as this could lead to more money being generated for them in retirement.
Avoiding Tax On Redundancy Payments
There are other ways to avoid paying tax on redundancy payments1.
For instance, you may be able to defer taking your payment if the company is owed a substantial sum of money from its investments or business operations. This means that they will not have to pay any income tax and national insurance contributions because the deferred amount is offset by their losses for whatever period it was produced with.
There are other ways of avoiding paying income tax and national insurance contributions when receiving redundancy payment – though it all depends on what has been agreed in the proposal for termination of the employment contract.
Here’s an example.
An employee may be able to defer taking their payout if the company owes them money from investments or business operations – as this offsets any deferred amounts by losses incurred during that period (this also includes capital gains). However, employers aren’t obligated to pay the tax and national insurance contributions for their employees – so this is a bargaining chip to use when negotiating an agreement.
Employees can also make sure that they have sufficient income to avoid paying any taxes or national insurance contributions2 by taking employment elsewhere before receiving their redundancy payment (though it could be hard to find another job quickly).
Be Careful Not to Exceed the Annual Allowance.
It’s also worth remembering that the government might offer some support for people who have been made redundant and want to set up their own business – so it’s always worth checking what help is available in your area.
A person on average earnings (about £25,200) won’t be able to receive more than about 12 weeks’ pay from an employer after being made redundant (£26 times 52). This means they’ll need savings or other sources of income if they are going to survive any more extended period out of work.
If a person has been made redundant, they must look for another job as soon as possible. Otherwise, the benefits of their redundancy are likely to be lost – and this may include any lump sum or enhanced pension payments they were expecting when leaving the company.
What Happens To My State Pension If I’m Made Redundant?
Another benefit that may be lost when a person is made redundant is their state pension. Of course, it will depend on what age the person was when they left work and how much money they have saved for retirement – but many people who are laid off before the age of 65 will lose their entitlement to the entire state pension.
Let me tell you something,
If a person is made redundant and has reached state pension age, they will still claim the entire payment – but if they have been in work for less than ten years, their entitlement can decrease significantly. For example, 24 would lose up to £13 per week from their payout by leaving at this time, while someone aged 44 or younger may only receive an extra two pounds on top of what they already get in benefits.
However, these changes are not guaranteed- and everyone must avoid borrowing money when trying to survive any more extended period out of work.
In some cases, people might also face financial difficulty after being made redundant because many companies stop paying into employees’ pensions once somebody leaves.
This means that the government is often forced to step in, as it does not have jurisdiction over private pension schemes. Recently there has been a rise of legislation explicitly designed to ensure people are compensated if their employer stops paying into their fund – but this doesn’t always guarantee an individual will receive what they would have done otherwise. Many employees can still lose up to 20-30% of their entitlement after being made redundant without any form of protection. At the same time, some companies now offer financial help when someone leaves them for redundancy purposes (often around 30 months).
Transferring Your Pension To A New Scheme
One of the biggest mistakes that somebody made redundantly can make is not transferring their pension to a new scheme. This would be an individual’s responsibility. They will need to check if this option is available on their old company website or with The Pensions Regulator before deciding whether it’s worth doing, as some companies do not offer this.
For example, in the event of someone leaving their company for redundancy purposes, they were employed by that organization for longer than two years and are under 45 years old. They will be entitled to a guaranteed minimum income from their pension scheme (subject to certain conditions).
This could range between 25%-75% depending on how long an individual was employed with a particular employer before being made redundant. If somebody leaves employment after working there less than two years, though, then it is likely they won’t have any entitlement or protection from that former company’s pension scheme.
Combining All Your Pensions
The other option is to consolidate all of your pensions together. This can be done by transferring them into one scheme or taking a cash lump sum from each for an additional pension fund and investing that pot in the way you see fit.
One advantage with this route is it increases the chance of finding what is called “pension income adequacy, which means being able to generate enough money from your future pensions so as not to rely on state benefits like Income Support or Pension Credit when retired.
Keep in mind,
The flip side, though, is that people will have less control over where their money goes if they go down this route because there’s no guarantee how much could end up being invested in stocks versus bonds, etcetera; whereas if someone has more than one pension they can tailor their investment strategy to suit.
Got Questions? Check These First
Can you put a redundancy payment into a pension?
Yes, you can put a redundancy payment into your existing pension scheme. The amount you save is tax-free, and the money will be invested according to the rules of your scheme.
However, if your employer does not offer an occupational or private pension, there would be no option for putting this payment in retirement – it would just go straight into a bank account instead.
Is being made redundant affect my State Pension?
No. If you are made redundant, the law states that your State Pension will not be affected, and it should continue to come in a set amount each month – unless you get another job for more than 16 hours per week.
Does redundancy affect your pension?
If you are made redundant, your pension is not affected as long as this doesn’t happen before 55.
Do I lose my pension if I get laid off?
No, your pension will be safe and invested according to the rules of your scheme. However, if you have left before reaching 55, then it isn’t guaranteed that this money will come in a set amount each month – unless you get another job of more than 16 hours per week.
To sum up:
If you are made redundant, it is essential to know what happens to your pension. You may be eligible for a lump-sum payment of up to 25% of your annual salary if you were with the company for at least two years and have been in receipt of an occupational or private pension.
If these conditions do not apply, then there will be no entitlement to any money from your employer’s scheme unless they offer contractual benefits on dismissal without notice. This means that many people who find themselves unemployed often end up worse off financially than before as their income has ceased, but their spending habits remain unchanged.