What happens to my pension if I am made redundant?

If you’re made redundant, your employer will stop making payments into your workplace pension. Depending on your circumstances, you may be able to keep the pension where it is, transfer it to a new workplace or personal pension, or take early retirement. Your state pension and any existing pensions won’t be affected.

Defined contribution pension options

When you retire, a defined contribution pension pays out income based on how much money was paid into it and how it performed over time. This type of pension is most common.

If you have this type of pension, your may choose to do the following if you’re made redundant:

  • Keep your pension where it is

  • Transfer to a new workplace pension

  • Transfer to a personal pension

If you decide to leave your pension where it is, you and your employer will stop paying into it and whatever’s left in the pension will continue to grow over time. This option doesn’t cost you anything, but you’ll continue to pay any ongoing management fees to your pension provider.

If you set up a new pension with a future employer, you may want to then transfer your existing pension to it. This will make sure you’re not paying multiple fees to different pension providers and save you the hassle of managing more than one pension.

If you decide to become self-employed or start your own business, you’ll also want to set up your own personal pension. Transferring your old pension to it will ensure you don’t pay multiple fees or spend more time than necessary managing more than one pension.

Defined benefit (final salary) pension options

When you retire, a defined benefit pension pays a guaranteed income based on your salary and the number of years you worked for the employer.

If you have this type of pension, your may choose to do the following if you’re made redundant:

  • Keep your pension where it is

  • Transfer to a new workplace pension

  • Transfer to a personal pension

  • Take early retirement (if applicable)

Defined benefit schemes are generally considered more attractive than other types of pension because they’re not linked to the performance of financial markets. They can also include other benefits such as being linked to inflation and paying out to a partner if you were to die.

For this reason, you may prefer to keep your pension where it is or transfer it to another defined benefit scheme at a new workplace. However, you may find this difficult to do in practice because many employers no longer offer this type of pension.

Transferring it to a workplace or personal defined contribution scheme is worth considering if you prefer greater flexibility, including accessing your pension early, choosing how much and how often to withdraw from it, and passing your remaining pension on tax-free when you die.

You may also prefer to transfer your current pension if you’re not confident that the company will still be in a good financial position or even in business by the time you retire.

You may be able to take early retirement if you’re over 55 (57 from 2028), but this will likely result in a reduction of annual income and other benefits.

Can you put a redundancy payment into a pension?

The money you receive from severance pay is yours to spend as you wish.

You can use that money to increase the amount you put towards regular pension contributions, or you can make a lump-sum contribution.

This can be arranged either through your employer before you leave or directly with your pension provider.

Avoiding tax on redundancy payments

Redundancy payments contribute to your annual taxable income, so you may find that the additional income could move you into a higher income tax band.

To prevent this, you may wish to ask your employer to put some or all of that severance pay into your pension before you leave. This is known as ‘redundancy sacrifice’.

Be careful not to exceed the annual allowance

The annual pension allowance lets you pay 100% of your earnings or £60,000 (whichever comes first) into your pension before incurring a tax penalty.

It’s therefore important to check whether any additional contributions could carry you over that threshold.

What happens to my state pension if I’m made redundant?

The amount of state pension you’re entitled to depends on the number of years you’ve paid National Insurance.

You’ll need to have paid National Insurance for 10 years to receive the minimum state pension amount, and 35 years to receive the maximum amount.

If your redundancy leads to a long period of unemployment, or adds to any previous stretches of unemployment, your future state pension income could be limited.

However, you can catch up on National Insurance contributions by making voluntary payments if you’re able.

Transferring your pension to a new scheme

If you do decide to transfer your pension, you’ll be pleased to know that doing so is an easy process these days.

To transfer your pension, you’ll need to:

  • find a new provider that offers a suitable pension you want

  • consider whether there are any transfer fees to pay

  • request that your new provider initiate the transfer

Legally, you’re required to get financial advice if you’re looking to transfer either:

  • a defined benefit pension worth over £30,000

  • a defined contribution pension worth over £30,000 that guarantees retirement income

Bear in mind that your existing pension provider will need to allow outgoing pension transfers, and your new pension provider will need to allow incoming pension transfers. Most providers do, but some either don’t allow it or have conditions that need to be met first.

Combining all your pensions together

As you move between jobs, you may find yourself accumulating multiple pensions. This can be a headache to manage and could result in paying more fees than you need to.

Combining multiple pensions into one allows you to:

  • see exactly how much is in your pension

  • check whether you’re on track to reach your savings goal

  • pay only one set of fees

  • have all your retirement savings in the most suitable plan

  • manage your contributions and withdrawals in one place

If you choose to combine your pensions with PensionBee, you’ll also benefit from:

  • a free and simple pension transfer service

  • one fair and transparent management fee

  • a simple but powerful app to manage your pension with ease

  • a range of plans offered by the world’s largest money managers (including State Street Global Advisors, BlackRock, HSBC, and Legal & General)

  • your own UK-based BeeKeeper to look after you and your pension

Risk warning

As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.

Last edited: 06-04-2024

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