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Where Taxpayers and Advisers Meet

Voluntary retirement offer from Employer - Tax & PensionImplications

anjo56
Posts: 24
Joined: Wed Nov 29, 2017 8:27 pm

Voluntary retirement offer from Employer - Tax & PensionImplications

Postby anjo56 » Fri Jun 12, 2020 2:50 pm

Hi
My firm is offering voluntary retirement with a potential package of £65k . The first £30k is tax free, I understand, but would welcome advice about how to deal with the balance in the most tax-efficient way. I am in the company DC pension scheme (via salary sacrifice) and have been overpaying AVCs to keep my tax bill in the 20% bracket. Assumed departure 31 July 20 so not much time to act. Should I seriously ramp up pension contributions to offset tax bill, given that it's early in the financial year and I won't be there to hit the £40k threshold for contributions? Any other thoughts, advice most welcome. Many thanks.

jerome.lane
Posts: 227
Joined: Mon Aug 12, 2019 8:41 am
Location: Sandhurst, Berkshire
Contact:

Re: Voluntary retirement offer from Employer - Tax & PensionImplications

Postby jerome.lane » Sat Jun 13, 2020 6:15 am

Unless you’ve been massively over contributing, you may have some carried forward annual allowance from last three years so you can easily make excess contributions. You might also want to look at EIS/SEIS investments so maybe talk to a financial advisor. It shouldn’t be a massive issue if you’re going to put your feet up for the rest of the tax year. The way 2020 is going, this wouldn’t be a bad plan!
Jerome Lane
Tax Adviser
Telephone: 07943 005902

darthblingbling
Posts: 346
Joined: Wed Aug 02, 2017 9:09 pm

Re: Voluntary retirement offer from Employer - Tax & PensionImplications

Postby darthblingbling » Sat Jun 13, 2020 11:49 am

As an aside, if the payment is in anticipation of your retirement, your employer really should seek advice to confirm that this would fall under the EFRBS legislation as this hurdle needs to be jumped (amongst others) before you can consider it to fall within s401 and get the £30k exemption.

anjo56
Posts: 24
Joined: Wed Nov 29, 2017 8:27 pm

Re: Voluntary retirement offer from Employer - Tax & PensionImplications

Postby anjo56 » Sat Jun 13, 2020 6:00 pm

Thanks both for the replies but sorry, don't recognise any of the acryonyms you mention. This is completely new territory for me.

ben_power
Posts: 17
Joined: Tue Feb 27, 2018 8:34 pm

Re: Voluntary retirement offer from Employer - Tax & PensionImplications

Postby ben_power » Wed Jul 01, 2020 10:22 pm

Hopefully this reply isn't too late. By way of clarification, I'm a senior adviser for a large IFA firm, I advice on this exact situation for 100's of clients a year.

I thought I would clarify a couple of things.

EFRBS legislation is extremely unlikely to apply but you could check. It's an unapproved pension scheme so your employer is very unlikely to use one.
Please do not consider EIS or SEIS schemes unless you are an experienced investor with a high tolerance to risk. They have very attractive tax advantages only because they are 'risky'. The tax advantages are there to encourage investors that have the aptitude, knowledge and experience to accept the risks involved. Most average investors do not.

Typically you can take the £30k as a tax free payment and in 'most' circumstances making an additional payment into your works DC scheme is sensible due to the tax advantages. If as you say, you firm offers salary sacrifice they pay the additional payment £35k into the DC pot so you have no need to claim the tax back (as it won't have been deducted AND you also bypass the National Insurance contribution). From a tax perspective this can be very attractive however, this is subject to both Annual Allowance (AA) and Lifetime Allowance (LTA) issues.

AA - You can make a maximum annual pension contribution of £40k as long as you earn at least £40k. Essentially, if you earn £30k you maximum gross contribution (employer, employee or third party) would have an upper limit of £30k. However, you are able to utilise 'unused' AA from the previous 3 tax years if you earn above £40k. In this tax year your relevant earnings will be your salary (from April 2020 to July) + the payment above the tax free amount (£30k) so £35k meaning you could contribute (via salary sacrifice) as much as £75,000 providing you have unused AA from the previous 3 years, this is called 'carry-forward'.

LTA - The maximum value of your combined pension pots (including DC and DB (Defined Benefit)) has a maximum limit of £1,073,100 (2020/21) meaning that whilst you can contribute more and the pots can still grow above it you will have a lifetime allowance change at some point (latest of age 75) which will negate the benefit to the tax relief on the way in.

Pensions are complex, please seek advice from an IFA, this should only be constituted as guidance as without knowing the full financial picture nobody can determine the suitability. The fact you mention AVCs (Additional Voluntary Contributions) would sometimes indicate having a separate Defined Benefit pension so it's important to understand how a potential DB pension has increased in value over the last year as this will utilise some of your AA.

darthblingbling
Posts: 346
Joined: Wed Aug 02, 2017 9:09 pm

Re: Voluntary retirement offer from Employer - Tax & PensionImplications

Postby darthblingbling » Sun Jul 05, 2020 11:09 am

My point on the EFRBS was more aimed at the first £30k and not the balance that is to be paid into a pension scheme as the OP is of the opinion that this first £30k payment will be exempt from tax under s401. But as the payment is in relation to retirement it may not even reach this part of the legislation and could be taxed as employment income as it is clearly a payment in anticipation of retirement.

I appreciate that the balance may be exempted however under other various parts of the legislation as it is being paid into a registered pension scheme.


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