How to manage redundancy when you’re close to retirement

Mature businessman leaving his job carrying his belongings

(Image credit: Getty Images)

published 10 July 2024

The redundancy rate for the over-50s is rising. According to the Office for National Statistics (ONS), there were 34,000 redundancies among the over-50s between February and April 2024, up by 11,000 compared to the same period in 2022.

Nearly one in ten people (9.54%) who are over 50 but not yet at pensionable age left work involuntarily in 2023, according to the International Longevity Centre (ILC).

Elaine Smith, senior programme manager for the campaign group the Centre for Ageing Better, says: “Workers over the age of 50 who are made redundant can experience particular challenges, as they are three times less likely to return to work within three months than those under 50.”

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If you’re approaching retirement and made redundant, your pension is likely to be a key part of your retirement fund. Here’s how redundancy could impact your retirement planning.

What can I do with my redundancy payment?

If you’re made redundant and you’ve worked for a company for at least two years, you should receive a payout.

The first £30,000 of a statutory redundancy payment is paid tax-free. You could put some of this money into your pension. Your employer may pay some, or all, of your payout directly into your pension through what’s known as ‘redundancy sacrifice’.

But make sure you don’t need this money to meet living costs and that you’re not breaching your annual allowance. You can pay up to £60,000 (or 100% of your earnings, whichever is lower) into your pension in the 2024/25 tax year and receive tax relief.

Becky O’Connor, director of public affairs at PensionBee, says: “The financial and tax benefits, including tax relief, of adding a redundancy payment in your pension are significant – especially if you are approaching the age you can access your pension money, anyway, with the added bonus of some tax relief and ideally some investment growth, too.”

How will redundancy affect my pension?

When you’re made redundant, any workplace pension payments you made during your employment still belong to you. The only change is that your employer will stop contributing to that pension on your behalf.

If your pension is a defined contribution (DC) pension, you have options. You may continue making contributions if your pension scheme allows. Alternatively, you can move your pension pot to a new employer’s scheme or a personal pension – like a self-invested personal pension (SIPP) or a ready-made pension plan.

One reason to move your pension is if you can benefit from lower charges elsewhere or a wider investment choice. At retirement, the size of your pot will depend on how much you’ve contributed over time, and on the performance of your investments.

If you have a defined benefit (DB) pension or final salary scheme although you can transfer your pension to a new workplace pension scheme, or personal pension, you’re likely to leave your pension where it is.

Defined benefit schemes are the gold standard, and the Financial Conduct Authority (FCA) states that you must seek financial advice before transferring a defined benefit pension if it’s worth £30,000 or more. Unlike defined contribution pensions, they aren’t linked to investment returns. With a DB scheme, the amount you receive at retirement is guaranteed, based on your final salary and length of service.

Can I continue to pay into my pension?

You may be able to continue paying into your workplace pension, but this depends on your particular scheme’s rules. For example, the government’s Nest workplace pension allows you to continue contributions.

Alternatively, you can move your pension pot to a new employer’s scheme or your private pension and continue contributing. However, you typically can’t continue contributing to a defined benefit pension once you’ve left that company.

Will I have a shortfall in my state pension?

You may face a shortfall in your state pension if you’re made redundant before building up enough ‘qualifying years’ of National Insurance (NI) contributions. To receive the full new state pension (£221.20 per week in the 2024/25 tax year), you need 35 qualifying years of NI contributions.

You can find out how much state pension you’re on track to receive by applying for a forecast (applying online at Gov.UK is the quickest method). The forecast will show your current NI record and how much you’re likely to get if you continue working up to the state pension age.

You can make up for any shortfall by buying voluntary Class 3 NICs. It costs about £824 to buy a missing year, boosting your state pension by around £329 a year. You may be entitled to NI credits if you claim certain benefits or have caring responsibilities.

Can I retire early? What will the impact be?

If you’re considering early retirement after redundancy, consider the potential shortfall in your pension income. Redundancy over 50 can have a big impact on retirement savings, with those affected saving on average £29,000 less in their pensions, according to analysis by Legal & General.

For example, someone earning £40,000 a year and contributing 10% of their salary into their pension pays in about £333 a month. If they retire early, at 57 instead of 67, assuming a 6% annual return after fees, they’d need an extra £55,000 to bridge the 10-year gap, according to the wealth manager Evelyn Partners.

Gary Smith, partner in financial planning at Evelyn Partners, says: “They will be sacrificing 10 years of pension tax relief, employer contributions and investment growth, as well as having to fund a retiree lifestyle for 10 more years.

“If someone pays a redundancy lump sum into their pot that could go some or all of the way to compensating for ongoing contributions, though, depending on the sums involved.”

Can I afford to retire?

According to the Pensions and Lifetime Savings Association (PLSA), a single person needs an income of £31,300 for a ‘moderate’ standard of living in retirement, rising to £43,100 for a couple. If you have a full state pension at £11,502 each as a couple, you’d need to receive an additional pension income of about £10,050 each a year to receive enough income. You can use one of the many online calculators to see if you are saving enough for your retirement.

However, retirement could cost less than you think. You’ll probably pay less tax in retirement, as you won’t be paying National Insurance (NI) on your income, and you can use your tax allowances to maximise your income.

You also have more choice than ever with your pension savings following the introduction of pension freedoms in April 2015. For example, you might remain invested in a flexible drawdown plan, taking only as much income as you need.

Harriet Meyer is passionate about helping people manage their finances. She's won national awards for 'cutting through the jargon' around the more complex areas of pensions and investments. Harriet is a regulator contributor to a range of national newspapers, magazines, and websites. She started her career as part of the Daily Telegraph's Money team, and has since edited The Observer newspaper's 'Cash' section and worked as a producer for BBC Radio Five Live's Wake up to Money. Outside of work, she loves exploring the world and volunteers for Crisis.