The UK job market remains under pressure, with hiring slowing and businesses bracing for rising costs. Recent surveys from KPMG and the Recruitment and Employment Confederation (REC) show a continued decline in permanent and temporary job placements as firms cut back amid economic uncertainty.

The October 2024 Budget introduced major tax hikes, including a rise in employers' National Insurance contributions from April 2025, adding further strain on businesses. With the Spring Statement approaching, concerns are growing over how upcoming tax changes will impact jobs and wages in the months ahead. All this together creates an uncertain job market where redundancies can become a very real possibility.  

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When faced with significant life changes like redundancy and the subsequent options of finding a new job or retiring early, it can be challenging and bewildering to figure out the best course of action. If you encounter redundancy, what factors should you take into account when considering your pension? 

What happens to my pension if I am made redundant?

If you are thinking about what redundancy means for your pension savings, the good news is that any pension you have built up is still yours, and you do not lose any part of it due to your change in circumstances. However, any contributions made by your employer into your pension will stop. Whether you can continue making personal contributions will depend on the type of Pension you have – which we will explore later.

In addition to your workplace pension, you might have been building up your State Pension or accumulating other pensions, like a Self-Invested Personal Pension (SIPP), which are not impacted by redundancy. However, it is important to note that if you experience a work hiatus due to redundancy, your State Pension credits will cease until you resume employment or start receiving eligible benefits, like Job Seekers Allowance.

What type of pension do you have?

The type of pension you have will largely determine what options you have post-redundancy. In the UK there are two pension scheme types: 

1. Defined Benefit (DB) - also known as a final salary pension.
   A DB pension is an occupational pension scheme that provides a promise of income for life at retirement, sponsored by the employer, and typically determined by the number of years you have been employed by the company.
2. Defined Contribution (DC) – also known as a money purchase pension.
   A DC pension can be either an occupational pension scheme provided by an employer or an individual scheme funded by the member (and can also be added to by the employer). With this type of arrangement, benefits at retirement will be dependent on the level of contributions made by the member (and employer) and investment returns on those contributions.

What are the options for your pension after redundancy?

When faced with redundancy, your pension remains protected, but your options depend on the type of pension scheme you have. Here’s a simplified breakdown of your choices: 

Option 1: Leave your pension where it is 

Defined Contribution (DC) Pension: If you have a DC pension, you can leave it with your current provider, and it will continue to be managed until you decide to take your benefits, typically from age 55 (57 from 2028).

• The value of your pension pot will rise or fall based on the performance of your investments.
• You might also be able to continue contributing to this pension, but you’ll need to confirm this with your new employer or pension provider.

Defined Benefit (DB) Pension: With a DB pension, you can leave your pension in the scheme, where it will remain until you reach the retirement age specified by your scheme (usually around 65 or 67). You will still receive the benefits promised to you, based on your salary and years of service.

• You can also take early retirement if the scheme allows, but your pension will be reduced since it will need to last for a longer period. 

Option 2: Transfer your pension to a new provider 

If you prefer to consolidate your pensions, you can transfer your pension pot to a new provider. You may do this with a DC pension, but it’s important to understand the potential pros and cons of transferring, especially with DB pensions, as this might mean giving up valuable benefits.  

• DC Pension: You can transfer the value of your pension to a new provider, which might be your new employer’s pension scheme or another personal pension.
• DB Pension: Transferring a DB pension is more complicated. If you are considering this, you should seek professional advice to ensure that you do not lose valuable pension benefits. 

How can you access your pension?

Based on current legislation, you are only able to access your pension from the minimum pension age of 55 (increasing to 57 in 2028), there are very few exceptions to this rule, and redundancy does not fall into that category.

Whilst this is the general rule, typically, DB schemes will have a scheme specific age which will be the minimum age that you can access your pension benefits without penalty.

Can you put redundancy money into a pension?

In short, yes you can, and it can be quite tax efficient to do so as any redundancy payment over £30,000 is taxable as income. Statutory redundancy pay does not include things such as holiday pay, unpaid wages or payment in lieu of notice which would be taxed as normal employment income.  

Should you wish to contribute into your pension using your redundancy payment, you should also be aware that there is a maximum amount that you can contribute each year tax efficiently. This is the lower of the following:

• The annual allowance less any employer or employee contributions (or DB funding) already made in the tax year, for the current tax year (2025/26) is £60,000. If you have not used all your Annual Allowance in the previous three years, then you may be able to carry forward any unused allowance to be utilised in the current year, allowing more than £60,000 to be contributed.
• Your relevant earnings for the year or £3,600 (£2,880 net) - whichever is higher. Only the portion of a redundancy payment above £30,000, which is taxable as income, counts as relevant UK earnings for pension contribution purposes. The tax-free £30,000 portion does not qualify as relevant earnings and cannot be used to justify pension contributions beyond the basic £3,600 limit if you have no other earnings 

There are two ways of doing this:

1. You can use part of your redundancy payment to make a pension contribution.
2. Or, should your employer agree, you could give up some of your redundancy payment as an employer contribution known as a ‘redundancy sacrifice’. 

Example: Redundancy sacrifice pension

Samantha has earned £60,000 in this tax year and has been made redundant. She has accepted a redundancy package of £35,000 and wants to consider her options in terms of pension contributions.

As the first £30,000 of her redundancy payment is paid tax-free there would be no additional benefit for her employer to make this pension contribution on her behalf, as she would not receive tax relief from an employer pension contribution.

The surplus above the first £30,000, i.e. £5,000 would be subject to income tax however, at her marginal rate. Therefore, should her employer agree to sacrifice this into her pension, there would be no tax due, giving her a tax saving of £2,000 as she is a higher rate taxpayer.

It is important for Samantha to also consider any other pension contributions she has made in the tax year to ensure she does not over-contribute and have an annual allowance charge. If Samantha is unsure, she should seek the advice of a financial adviser who could guide her.

How can we help?

If you have been made redundant, or are in the process of being made redundant and you are unsure of what course of action to take with your pension, get in touch with one of our advisers who will be happy to help. We’re currently offering anyone with £100,000 or more in pensions, savings and investments a free retirement review worth £500.

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This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions. 

A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless the plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.  Your pension income could also be affected by the interest rates at the time you take your benefits.

Levels, bases and reliefs from taxation may be subject to change