Monday, 18 May 2015

Having My Hand Forced... Probably a Good Thing?

Virtually as soon as the election result came in the managers in my section issued invitations to 1-1 sessions with all staff above a certain grade and announced the fact that we are to be offered Voluntary Redundancy in the summer to take effect from April 2016.

It has been on the cards for some time . We have been steadily bleeding staff for several years and yet more savings need to be made in order to accommodate the next round of government spending cuts. Given the fact that this government now has an overall majority there is also a strong likelihood of privatisation and/or outsourcing of services.

In order to keep a basic level of service going, front-line staff who deal directly with the public, are being protected as much as possible from the cuts, although there has been a significant drop in numbers here too. This means that those of us who look after the infrastructure are being targeted.

Don't get me wrong, it would probably be a blessing for me personally to be accepted for VR. In the past people over 55 have been given the chance to choose to go as part of "efficiency savings" rather than be made redundant, which means that they have been given access to their pension immediately and without reduction. This would be an absolute godsend to me as I would receive my pension, as accrued up to date (around £8,500 pa) from next April. Happy days :-). However there is some doubt that the same rules will apply this time round as letting people have their pensions early is very expensive when compared to making them redundant.

We are currently waiting to find out what the terms of the offer will be, but in the meantime I am left with a bit of a dilemma. If I am offered the the redundancy pay only and no pension would I accept? My redundancy payment comes in at around £20,000 but taking it would mean that I would not get that final year of work which adds £500 extra to my pension for life. I'm still running the numbers and going back through the calculations I did last Oct, with the added complication that I've now decided to take my LGPS pension early. At the forefront of my mind is the vision of what working in my small section would be like, given that we are due to lose half the senior staff. That level of stress is not attractive at all. I think I'll be able to find the money somehow :-)

Of course I may not get accepted for VR if there are "cheaper" people who would like to go, or if it's considered too much of a risk to lose me. On the other hand I may get sent down the path of compulsory redundancy anyway if not enough people take up the offer. The next few months will tell. I will certainly feel much happier when I know exactly where I stand. The uncertainty doesn't help my financial planning though, specifically around the choice of funding AVC's as against SIPP. Watch this space.


  1. If you took the £20k VR payment and put it in a SIPP and returned 3.5% income p.a. you'd end up with £700 per year. Sure it's not a state backed return but it is 40% higher each year than the alternative and you'd have an extra year of your life....gotta be worth thinking about.

    Don't forget you'd presumably get some tax relief added to that, potentially making it £24k which would net you £840 pa off the same 3.5% yield.

    1. Thanks UTMT.

      That's certainly worth thinking about.

      The trouble is I had my figures all worked out to include another year's work and the salary that goes along with it and I'm not sure I would be able to fund that extra year out of my existing savings/investments without using at least some of the redundancy payment for living costs.

      Some planning is needed but as you say I'd have an extra year of freedom :-)

  2. That is a dilemma indeed. I don't envy you the choice there. Nonetheless, these things tend to work out for the good in the end.

    Certainly, as UTMT notes, if you did get the lump sum redundancy payment of £20,000 all you would need to return on that cash--assuming you were placed to be able to use it all for saving/investing--is 2.5% per annum to return that £500 a year you would lose from your pension. That does not seem to much of a stretch.

    Similarly, even if you set aside £5,000 for an additional emergency fund and invested/saved £15,000 a 3.5% yield on that lump sum would provide you more than £500 a year.

    Good luck with this. Even when the various alternatives are far from world-ending I know how stressful and anxiety-inducing the situation is!

    Wishing you all the best.

    1. Many thanks for the good wishes and the reminder that things will probably turn out for the best and in any case, I can't change things by worrying about them. As you say even if I do need to use some of the £20,000 what's left will help to make up the missing pension.

      I'll just have to make my decision, stick with it and see what the future holds.

  3. When I went a few years early I commuted some pension for extra lump sum, partly because we had debts to clear, and partly because I took a notion that "something would turn up" that would be a better investment than more occupational pension. I can't now imagine why I took such an absurdly optimistic attitude; maybe being about to retire had so cheered me up that it dulled my critical faculties. And lo!, I stumbled across something that did give a better return. Deferring my wife's old-style State Retirement Pension proved wonderful value, and tax-efficient to boot. Heh.

  4. I didn't mean to post a boast: sorry, I omitted to draw the conclusion for you. Something might turn up! For instance, an offer of part-time IT work, or the chance to run a small IT business of your own for a few years. Retiring may make you so cheerful and upbeat that difficulties dissolve. Onwards and Upwards!

    1. No need to apologise :-)

      Positive thinking - I'm sure you're right. That's the way forward.

  5. Hi Cerridwen

    If not for you, many of us would never be aware of the cutbacks imposed behind the scenes within the public sector, so sorry to hear you are in this situation. Despite the fact that it's been on the cards for some time, it's still horrible to actually experience this.

    Some good suggestions in the comments for you to consider with regards to investing the £20k into a SIPP to get the £500 you have factored into your numbers. However fingers crossed that if you get accepted for VR, you get that access to your pension immediately for happy days!

    The other week, we all received an email at work confirming that those who end up getting made redundant will be on an ‘enhanced’ package.

    I worked out that my payment would be just over 80% of my annual salary, which I'd have to keep as a liquid buffer in case I don't land on my feet fairly quickly with a half decent job.

    The worse part of all this as you say is the uncertainty, not knowing what's going to happen. Or when.

    Ours still looks like it's going to drag on for a while, which I don't mind really as each week I'm here is another week that gets included in my redundancy calculation!

    I hope things works out for you.

    1. Hi weenie,

      Many thanks for the words of support. My situation is uncertain but yours must be far more of a worry because I won't be in the position of needing to find another job, I know that I could make our funds stretch for that extra year if necessary.

      I hope you get some more information soon so that you get as much time as possible to make your plans. Fingers crossed for good news :-)

  6. You can do this. Take the money and run, you shouldn't break a sweat getting £500 p.a. investment return on £20k. More to the point, you get a year of your life back!

    I surrendered 8 years of accrual bunking off early. I've made most of that up with ISA dividend income, and I haven't even got my sweaty paws on my AVC fund of 1/4 of the DB pension capital which I was going to invest to compensate. Accepted that the stock market is in way out there space cadet territory but income varies less than market value,

    And of course consider slapping some of that 20k into a SIPP, provided you have earned more than 20k in that year (watch that April redundancy time if it's in the new tax year you might consider borrowing the £20k to get it into a SIPP this tax year when presumably you will earn at least 20k). That way you can get £4k added on by HMRC, have £15k out in May 2016 (25% PCLS=5k, plus personal allowance of £10800) and drift out the rest in TY 2017/8. Bung in ISA in whatever your investment of choice is and take tax-free income of £500 from your £24k in total.

    And enjoy an extra year of Life. Work is overrated!

  7. Hi ermine,

    Thanks. My main problem with trying to plan the finances is that I won't know if my application for VR has been accepted until maybe as late as October so I will need to be wary about how much money I put in my SIPP until then as, if I don't get VR and have to work another year, I will be in danger of having more in there than I can use in a tax-efficient way. (btw thanks for the reminder that I will need to put any funds in during this tax year whilst I am still earning).

    I may also need some of the 20K to live on for that extra, previously un-planned for year of life (not work) :-)

    The strategy suggested by yourself, UTMT and DD is something that I will think very carefully about. Getting extra into my SIPP as soon as I have the go-ahead makes a lot of sense.

    1. Brinkmanship is your friend - you can get all your ducks in a row with time to spare :)

      Say you get to know in November 2015 that you are getting an extra year of Life. Set yourself up to borrow the money in Feb 2016. Open your SIPP, say with HL in March 2016, lob borrowed £20k in by end of March 2016. You go end April, in the new TY. You get your £20k VR, which will be tax free because the first £30k of any redundancy payment is tax free. Repay loan beginning of May 2016 (if it makes sense in the bigger picture) - you've only had to front one or two month's worth of loan repayments. If you repay the loan you are now boracic lint, but not for long (and if you delay repaying the loan for a couple of months you can avoid that)

      Toss in another £2880 non-earner's allowance immediately in the new TY 2016/17 before you draw anything out because a free £720 never hurt anyone and it's rude to say no to free money. Your SIPP now has £24k + £3600 = £27600 in it. In May/June (HL claim from HMRC within two months usually) you may now take £6900 as a 25% tax-free PCLS. Plus your £10,800 personal allowance (less anything you earned in the new TY). So you're good for £17,700 by July at the latest, and there's still £9,900 waiting in your SIPP for collection next TY.

      £27200 return for an investment of £22880 (assume ~ £400 SIPP closure fees, probably less in fact) ain't a bad deal - it's about a £4k profit if you pay ~£300 for the loan between March to July. You're shot of the debt by July, you didn't have to act before you had clear information and it's in cash so you didn't have to take any investment risk.

      Choose Life ;) Well, choose whatever matches your opportunities, risk tolerance and personal preferences, but the taxman could be offering you an extra £4k to help you settle in, and pay your loan and SIPP fees.

      If you use your existing SIPP, of course, all this increases your tax-free PCLS which you suddenly get a hold of, so you might want to sell a PCLS + personal allowance worth of your investments and open an ISA next TY to take this on. But I believe you can take a tax-free PCLS of 25% from each SIPPs. Once you do take a PCLS, however, I believe your annual SIPP contribution limit drops to £10,000, but I'm not dead sure.

      Obviously DYOR and check the calculations, but it's one way to play this, you don't need to do anything before you know the result. It's a quick in-out - stick with cash, there's no point in taking investment risk for six months!

    2. "Once you do take a PCLS, however, I believe your annual SIPP contribution limit drops to £10,000, but I'm not dead sure." Taking the PCLS is OK: taking a penny more drops your annual allowance to £10k, which could potentially prove irksome at some time in the future, but for many people might not matter a jot. I suppose that makes a case for deferring drawing said penny as late in the tax year as possible, to keep options open for as long as possible.

    3. Much food for thought here.

      It's reassuring to be reminded that I don't need to do anything until I know which way things are going to go. So, for the meantime, I continue to pay into my AVCs direct from my salary. Once (and if) I get confirmation that I'm on the list then I start to think about how to get as much as possible into my SIPP. It probably won't be quite the £20,000 as I will have to watch that I don't let the total contribution (including my AVCs) exceed my earned income for the year. Taking a loan may be the way to go but our emergency fund isn't far off £20,000 so that may not be necessary.

      I can't imagine I would want to keep feeding the SIPP after I've started to empty it, but thanks both for the heads-up about the consequences of taking more than the PCLS.

    4. Thinking back on how I did this (I took VR in June, so not long after the TY start) I believe your VR payment does count as earned income from a pension contributions point of view. I tossed the excess over £30k into my pension AVCs, this was touted by the company as a good way to manage tax. I don't think I had earned as much as the extra by then, and anyway I was putting a lot of what I earned into the AVC fund. Definitely worth asking the question now, I may have confused the issue by saying you have to have earned that lump to stick it in a SIPP.

      You may indeed also have the option of tossing your VR payment into your AVCs - you could transfer some of that into a SIPP at your leisure. Another question worth asking there - can you part transfer? That gives you the option of using more of your AVC savings than 20k, indeed the capability to front-run your DB pension which gives you another investment option - invest in increasing your DB pension by not drawing it early if doings so gives you an actuarial reduction (fingers crossed that the VR option removes any actuarial reduction and lets you draw now, in which case rate-limit your SIPP withdrawal to ~£2500 p.a.or possibly use the UFPLS option to draw tax-free at ~£3000 p.a.if you don't need a tax-free lump sum)

    5. Thanks again ermine. I'm now prepared with questions to ask and actions to take. I'm not sure how the VR payment could end up in my AVCs given that they are currently deducted from my salary but I can at least ask. I will have to wait till (and if) I'm accepted though. :-)

    6. When I took it this was one of the questions they asked on the VR application - how much do you want put in the pension, as well as an option to spread the payment over another couple of tax years. It'll be different from organisation to organisation, but that it was possible is what matters. I put the amount over the tax-free limit into the pension - the tax-free 30k appeared in my last payslip as pay, so all that stuff about borrowing was a red herring, sorry! Of course, if you are trying to preload the SIPP with any more than the VR you need to do that before April (and keep it within the 40k annual allowance subject to any carry-forward you may use). It would seem advantageous, once you have the go ahead, to hit that SIPP/AVC fund as hard as you can as long as you can take it all out tax-free.

    7. If it's possible for one organisation then it should, in theory, be so for mine too so thanks for the info. Unfortunately I will be constrained by my income as to what I can put into SIPP/AVC as my earnings aren't over the £40,000 so "carry forward" doesn't apply. However if the redundancy is counted as "income" it might even turn up as April's pay and so run over into the next tax year which would give me a bit more leeway.

  8. Hi Cerridwen

    I won't repeat the sums in the other comments, but I do agree it could be a very good deal with a little planning.

    I had a similar experience about ten years ago, and it changed my life for the better. I did go into employment again, but partly as a result of my VR experience I'm now technically FI. Ever since my experience, I find myself saying "congratulations" when ever I meet someone with this opportunity.

    You could consider going contracting as a backup plan to getting a job. The money can be good, there is usually reasonable demand as long as we're not in a recession at the time, but there is no security. IMHO it is a reasonable short term plan (e.g. for a year).


    1. Hi Ric,

      It's surprising to hear how many people say that redundancy turned out to be a blessing in disguise. I suppose because it forces us into the change we were putting off making.

      For myself I think will probably opt for the extra year of retirement it would bring me rather than look for more work (so long as the finances work out OK). My husband retires in 12 working days' time so I'm sure I'll be ready to join him by then :-)

  9. Hi Cerridwen,

    Wow, it didn't take them long to push the buttons. Although, as you say they have been planning this for a while. I am never sure that outsourcing is a good thing, it seems short-termist and also ends up costing more in the long run - but that is a different story.

    Anyhow, there are some good suggestions here; fingers-crossed they offer the pension access option as part of the deal, I guess this depends on how many people are going and if they see this as a 'sweetener' to get people to go quietly.

    If they do outsource - you could find that the outsourcing company pick you up to do the same job - it maybe not what you want long-term but it could cover you for the 1 year that you need to feel you have the retirement pot you need then you quit!

  10. Hi sparklebeeblog,

    I totally agree about outsourcing but it does tend to look cheaper on paper, before the full service is priced up and in the short term and that seems to be all that matters at the moment. If we did get outsourced the value of an extra years' pension would likely plummet so I'm not sure it would be worth hanging on for that.

    It's going to just turn out to be a "wait and see" game in the end but thanks a lot for your support. :-)

  11. Hi Cerridwen,

    The uncertainty is the shimmering beast in the room, like you say it makes planning a pain. VR with no reduction would be a sweet deal and I imagine you would punch the air with delight if this was offered :). On the other hand, with the prospect of VR potentially on offer, how would you feel if nothing came of the cuts in the next few years? Perhaps you would punch your boss in the (face rather than the air)?

    I suspect if it is offered you will make things work :) Hope they don't much you all about too much and take too long over these things...

    Mr Z

    1. Hi Mr Z,
      There's no doubt that something will come of the cuts, and I don't mean anything to do with with my situation. See here if in any doubt of what's happened already. In the light of this my personal angst pales into insignificance.