Being made redundant can be a particularly difficult and uncertain time.
Alongside losing what may be a steady job with a regular income, you’ll no longer have access to benefits provided by your employer, such as pension contributions.
Yet any savings you have built up in your workplace pension continue to belong to you once you’ve left your job. There may also be various options available to you when it comes to what to do with your workplace pension, depending on the type of scheme you have paid into.
Here we explain how your pension is affected by redundancy, and what to consider when deciding what to do with your pot.
Contents
- Do I lose my pension if I am made redundant?
- Types of pension schemes and redundancy
- What can I do with my money purchase (defined contribution) pension if I’m made redundant?
- What happens to my final salary (defined benefit) pension if I am made redundant?
- What happens to my State Pension if I am made redundant?
- Can I put a redundancy payment into a pension?
- Where to get more help
Do I lose my pension if I am made redundant?
No, you won’t lose access to your workplace pension, but your employer will stop making contributions on your behalf. Whether or not you are able to continue paying into the pension, and what you can do with your pension, depends on the type of scheme you have.
Types of pension schemes and redundancy
Defined benefit, or final salary pensions: These schemes provide a guaranteed income for life at retirement, using a special formula to calculate your retirement income, which is based on a proportion of your final year’s pay, multiplied by the number of years you’ve belonged to the scheme.
It’s usually wise to leave a final salary pension where it is rather than transfer it to another pension scheme, as you may risk losing valuable benefits by doing so (see more below). Read more about how defined benefit pensions work in our article What is a defined benefit pension?
Defined contribution, or money purchase pensions: With a defined contribution pension, your benefits at retirement depend on how much you (and your employer if it’s a company scheme) have paid into the pension by yourself and your employer, alongside investment growth. These types of pensions may be moved to another scheme if you wish, depending on the charges you are paying and investment options, and whether you are happy with these alongside performance (see more below). Read more in our article What is a defined contribution pension?
If you’re unsure what type of pension you have, ask your employer/previous employers before checking your options. They should be able to clarify the details, alongside useful information such as current values, charges, underlying investments and projected retirement income.
In addition to your workplace pension, you may also have savings in private, or personal pensions, such as a self-invested personal pension (SIPP), and/or other savings such as individual savings accounts (ISAs). Being made redundant will not have any impact on your private pensions and savings, although you may not have enough spare money to pay into these for a period of time, until you find other work.
What can I do with my money purchase (defined contribution) pension if I’m made redundant?
If you’re made redundant but want to continue paying into your pension after you’ve left your job, contact your employer to see if this is possible. If, for example, you have been paying into the National Employment Savings Trust (NEST) pension, you can continue paying into it if you wish. However, if it’s a scheme linked to that employer you will have to stop contributing, but you may wish to do one of the following:
- Move your pension to a new employer’s scheme, if this is possible and you believe that it’s the right decision for you given the charges/investment options and potential for future growth.
- Transfer your pension to a private pension you set up yourself, so you can continue paying in if you want to. However, do your homework before transferring to ensure it’s the right option for you, and check any charges involved in the transfer. Find out more about whether combining your pension is the right option for you in our article Should I consolidate my pensions?
Alternatively, if you are around retirement age and are able to access your pension savings, you may decide to start drawing an income from your workplace scheme.
What happens to my final salary (defined benefit) pension if I am made redundant?
You will stop paying into the scheme and, usually, it’s best to leave your pension in a final salary workplace scheme. You then wait until you reach the scheme’s retirement age before you take your pension benefits.
You should seek financial advice if you are considering transferring out of such a scheme if, for example, you’re worried that the company may go bankrupt or the pension may fold. If you transfer out of the scheme, you are essentially giving up a guaranteed income which, especially in these uncertain times, can be extremely valuable.
Alternatively, you might want to transfer your savings in the pension to a new employer’s scheme or your own personal pension. However, bear in mind that the majority of pensions offered by employers are money purchase/defined contribution schemes, so it’s unlikely you will get access to a valuable final salary scheme again.
The Pensions Regulator (TPR) has ruled that pension companies must write to anyone considering giving up their so-called gold-plated final salary pensions to warn them that transferring is unlikely to be in their best long-term interests. Find out more about the pros and cons of transferring in our article Should I transfer my final salary pension?
What happens to my State Pension if I am made redundant?
Being made redundant won’t impact on any entitlement you have so far to the State Pension. However, time out of employment can affect how much State Pension you receive at retirement, as it may reduce the number of ‘qualifying years’ you have. Find out more in our article How the State Pension works.
You’ll only be eligible for the full State Pension, amounting to £203.85 in the 2023/24 tax year, if you’ve made 35 qualifying years of National Insurance contributions.
You’ll get qualifying years every year you’re in work, earning above a minimum amount (£242 a week in the 2023/24 tax year, which is known as the Primary Threshold) – or if you’re paying voluntary National Insurance contributions. You may still get a qualifying year if you earn between £123 and £242 a week from one employer. You can also get National Insurance credits if you’ve taken time out of your career to bring up children or look after someone who’s ill or disabled, or if you’re in receipt of certain benefits.
Can I put a redundancy payment into a pension?
Yes. You may find that paying a lump sum into your pension from your redundancy payment is tax-efficient. Any payment received over £30,000 is taxed at your marginal rate as income tax. However, make sure to check you aren’t breaching your personal annual allowance by doing so, which is the amount you can pay into your pension each year and earn tax relief. For the 2023/24 tax year this stands at £60,000 a year. Read more in our article How do pension allowances work?
You may be able to pay in more than the annual allowance, depending on your personal circumstances, under the pension carry forward rules. If you have not used all your annual allowance in the previous three tax years, then the unused amount may be ‘carried forward’ to the current tax year. It may be worth seeking professional tax advice before boosting your pension using your redundancy payment, to ensure you won’t face any unexpected tax bills. Learn more about this in our guide Pension carry forward explained.
Alternatively, you could ask your employer about so-called ‘redundancy sacrifice’, whereby they pay some or all of the portion of your payment that is liable to tax into your pension on your behalf. This way, you benefit from tax relief, and not having to pay National Insurance on this money.
Before paying redundancy pay into your pension, make sure you won’t need it to cover your living expenses, as once it’s in your pension it will be tied up at least until you reach the age of 55 (rising to 57 by 2028).
When you go through redundancy, you have plenty to think about and perhaps worry about without considering pension planning. Don’t make any rushed decisions. Only when you’re ready, should you think about what to do with your pension, and get an up-to-date forecast so you know where you stand.
Where to get more help
Keeping track of your pension savings can be difficult, and it may be one of the last things on your to-do list following redundancy. If you’re unsure what to do with your pensions, and would like professional advice, you can find a local financial advisor on VouchedFor or Unbiased.co.uk, or for more information, check out our guide on How to find the right financial advisor for you.
If you’re considering getting professional financial advice, Aviva is offering Rest Less members a free initial consultation with an expert to chat about your financial situation and goals. There’s no obligation, but if they feel you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.