Redundancy and your pension

Whether it’s the chance to pursue further education, embark on a completely new career path or even start your own business, redundancy can serve as a catalyst for meaningful change and growth. As you navigate this transition, your workplace pension is one of the most crucial aspects to consider. Understanding your pension options is key to making informed decisions that will impact your financial stability in the long term

What happens to your pension when you’re made redundant?

If you’ve been made redundant, the workplace pension you have been contributing to remains yours. You won’t lose it due to a change in your employment status. However, leaving a job or being made redundant doesn’t automatically grant access to your pension immediately.
The standard rules on how and when you can access your retirement savings still apply. This generally includes accessing your pension from age 55 (rising to 57 in 2028) and typically taking up to 25% of your pension pot as a tax-free lump sum.

The next steps depend on the type of pension plan you were paying into while employed. Two primary types of workplace pensions exist: defined contribution (DC) and defined benefit (DB) plans. If you’re unsure which type you have, you can ask your employer or check documents from your pension provider, such as your annual statement.

Defined Benefit (DB) pensions

If you hold a DB pension, typically found in the public sector, contributions will stop once you leave the job. The value of this pension pot is usually determined by the length of your employment and your salary.

Defined Contribution (DC) pensions

For those with a DC pension, the primary change is that your employer’s contributions will cease. Unlike a DB pension, you may be able to continue making personal contributions.

What can you do with your workplace pension?

Depending on your circumstances and the type of workplace pension you have, several options are available.

Continuing contributions

If you have a DC pension, you might be allowed to continue making contributions and benefit from any applicable government tax relief. The value of any tax relief will depend on your individual circumstances. Remember, you won’t receive further employer contributions after leaving your job.
All contributions, whether from personal, employer or third-party sources, count towards your annual allowance, which is £60,000 for the 2024/25 tax year.

Contributing your redundancy payment to your pension

You may be able to pay a portion of your redundancy payment into your workplace pension, typically applicable to DC pension schemes. This usually requires an agreement with your employer. Note that your redundancy payment might be subject to tax, with the first £30,000 usually being tax-free. Any portion paid into your pension will also count towards your annual allowance.

Transferring your pension

You might consider transferring your pension pot into another workplace or private pension, usually reserved for DC schemes. However, combining pension pots isn’t suitable for everyone, as you could lose features, protections or benefits. Always compare products before making a decision, as the value of your combined pension pot can fluctuate.

Withdrawing your money

Depending on your pension scheme’s rules, you can generally withdraw money from your pension pot if you’re aged 55 or over (rising to 57 in 2028). However, withdrawing from your pension requires several factors to be considered. If you stop working, this might affect your entitlement to the full State Pension if you haven’t accumulated enough qualifying years of National Insurance contributions. Also, taking a flexible income from a DC pension while continuing to work may reduce the amount you and your employer can contribute without facing tax charges due to the Money Purchase Annual Allowance (MPAA).

Leaving your pension as is

You can opt to leave your pension untouched until your retirement age, ensuring you keep your login details and personal information up-to-date. This helps you maintain track of your savings. Update your details by logging into your pension account or contacting your provider.

Take your next steps with confidence

The right option for you depends on various factors, including the type of workplace pension scheme you have. Pension schemes are legally required to provide specific information about your scheme. Understanding your options can give you a clearer idea of what will happen to your pension if you’re made redundant, allowing you to focus more on your future plans.

THIS ARTICLE DOES NOT CONSTITUTE TAX, LEGAL OR FINANCIAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS THE PLAN HAS A PROTECTED PENSION AGE).

THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE.

YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.