Redundancy and your pension: what happens and what to do

The short answer: the pension you’ve built up is still yours after redundancy. What stops is your employer paying in. Redundancy can also be a chance to save tax, by having part of your payout paid straight into your pension, and in some schemes it can let you take your pension early without the usual reduction. Here’s what happens to each type of pension, and the choices worth thinking about before you sign anything.

What happens to your pension

If you’ve been in a workplace scheme for less than two years, you might be offered a refund of your own contributions instead of a pension. That money is taxed, so it’s usually better to keep it in a pension if you can.

Redundancy at 55 or over

If you’re in a defined benefit scheme, this is the most important thing to check. Some public sector schemes treat redundancy differently from simply leaving:

• Local Government Pension Scheme: if you’re made redundant at 55 or over with at least two years in the scheme, your pension is paid straight away with no reduction for taking it early.
• Civil service, NHS and other schemes: the rules differ. Some let you use your compensation to buy out the reduction for early payment. Ask your scheme for a quote.
• Private final salary schemes: check the scheme rules. Some allow early retirement on redundancy with a smaller reduction, or none.

An unreduced pension from 55 can be worth more than the cash part of your package, so ask for figures before you decide, especially if you’re weighing up voluntary redundancy.

Paying your redundancy money into a pension

The first £30,000 of redundancy pay is already tax-free. Above that, it’s taxed at your normal rate. But if your employer pays the excess straight into your pension as an employer contribution, there’s no Income Tax or National Insurance on it at all:

Take a £50,000 redundancy package for someone who earned £60,000 in the tax year before leaving. Taken as cash, they keep about £42,000. If the £20,000 above the limit goes into their pension instead, they keep £30,000 in cash and £20,000 in their pension, £50,000 in total. Your employer saves 15% National Insurance on the excess too, so they’re often happy to do it.

A few things to check first:

• Annual allowance: total contributions in a tax year are normally limited to £60,000, including what you and your employer have already paid in. You may be able to carry forward unused allowance from the last three years. High earners can have a lower, tapered allowance.
• It must be agreed before payment: once the cash has been paid to you, it’s been taxed. The pension contribution needs to be part of the deal, usually written into your settlement agreement.
• The money is locked away until at least 55, or 57 from 6 April 2028. Only do this with money you won’t need to live on.

You can also pay into a pension yourself and get tax relief, but personal contributions only get relief up to the amount of your taxable earnings for the year, so the employer route is simpler. Our guide to tax on redundancy pay has the full picture.

Taking money out early

From 55 (57 from April 2028), you can take money from a defined contribution pension whether or not you’ve been made redundant. It can be tempting to use it to cover a gap, but think it through:

• A quarter is usually tax-free. The rest is taxed as income in the year you take it.
• The first withdrawal is often over-taxed on an emergency tax code. You can claim it back from HMRC.
• The £10,000 limit: once you take taxable money flexibly, the amount you can pay into money purchase pensions with tax relief drops to £10,000 a year for good. Taking only the tax-free cash doesn’t trigger this.
• Benefits: under State Pension age, money left in a pension isn’t counted as savings for Universal Credit. Once you take it out and keep it, it is.

If you’re 50 or over, you can get a free Pension Wise appointment from MoneyHelper to go through your options before you take anything.

Keeping track of your pensions

Before you leave, get the scheme name, your member number and the latest statement. If you’ve had several jobs, you may have several small pots. Combining them can cut fees and make them easier to manage, but check for exit charges or valuable guarantees first, and never transfer out of a defined benefit scheme without regulated advice. You must take advice if it’s worth more than £30,000.

Don’t forget your State Pension

You need 35 qualifying years of National Insurance for the full new State Pension. If you claim Universal Credit or New Style Jobseeker’s Allowance while you’re out of work, you’ll usually get National Insurance credits automatically, so the gap doesn’t cost you a year. Check your record on GOV.UK.

To see the effect of a break in contributions, use the pension calculator. Our guide to pension savings by age shows how you compare.

This is general information, not financial advice. Pension rules are complex and decisions can be hard to reverse, so consider speaking to a regulated financial adviser, especially before transferring or taking money out.