Pension Planning and Redundancy: What to Do With Your Workplace Pension When You Lose Your Job

Redundancy and Your Pension: The Immediate Questions

Redundancy is disruptive at the best of times. Among the immediate financial concerns — the redundancy payment itself, income continuity, and the job market — the workplace pension often receives insufficient attention in the immediate aftermath. This is a mistake: the decisions made in the weeks and months following redundancy can have a material impact on retirement income.

This guide addresses the key pension considerations for employees who have been made redundant, including those with defined benefit (DB) and defined contribution (DC) arrangements, and those considering an international move.

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What Happens to Your Workplace Pension on Redundancy?

Defined Contribution Workplace Pensions

When employment ends — including through redundancy — both employee and employer contributions to a workplace DC pension cease. The fund remains invested within the scheme and continues to grow (or fall) in line with investment performance.

Your pension pot is entirely your own: your employer cannot recover contributions already made. The pot remains with the scheme provider until you transfer it, take benefits, or the scheme winds up. There is no time limit on leaving the pension with the existing provider.

Options once you have left the employer:

1. Leave the pension with the existing scheme (deferred member). Charges may be different from active member rates — check the scheme's terms for deferred members, as some providers apply higher charges once contributions cease.
2. Transfer to a personal pension or SIPP. This gives you control over investment choice and consolidates the pension with other arrangements. Exit penalties may apply — particularly in older schemes invested in with-profits or smoothed funds; check before initiating a transfer.
3. Transfer to a new employer's scheme. If you join a new employer, you can transfer your deferred pension into the new workplace scheme, though not all schemes accept transfers in.

Defined Benefit Workplace Pensions

A DB pension becomes a preserved (deferred) pension on leaving employment. The benefit is typically your accrued defined benefit calculated to the date of leaving, revalued annually to the scheme retirement date.

Key points:

• Early leavers' protection: Deferred DB pensions are revalued in line with statutory minimum requirements (limited price indexation — CPI, capped). Older schemes may have different rules.
• Deferred retirement date: Usually the scheme's normal retirement date, which may differ from the State Pension age. Early retirement is possible, typically with an actuarial reduction.
• Transfer value: You may request a Cash Equivalent Transfer Value (CETV) and transfer the DB pension to a SIPP or QROPS. For transfers above £30,000, FCA-regulated financial advice is a legal requirement. Given the value of DB pensions, transfers should be approached with great caution — the certainty of a guaranteed income stream is typically highly valuable.

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Employer Contributions Stopping: The Impact

For someone in mid-career with a DC pension, the immediate effect of redundancy is the cessation of employer contributions. Depending on the employer, these might represent a significant proportion of total pension funding — for example, an employer matching 5% on a salary of £80,000 means £4,000 per year in employer contributions lost while unemployed.

Equally, personal contributions through payroll cease automatically. You can continue making personal contributions to your pension during a career gap from personal resources, subject to:

1. The earnings-related limit: Pension contributions receive tax relief only up to 100% of UK-taxable earnings in the tax year. If you have no earnings (for example, living off savings or redundancy pay while unemployed), your maximum contributions with tax relief fall to the non-earner limit.

2. Non-earner contributions: Even with no earnings, you can contribute up to £3,600 gross per year (£2,880 net with basic rate tax relief added at source) to a personal pension. This is often overlooked.

3. Redundancy pay as earnings: Statutory redundancy pay and most contractual redundancy payments are not classed as earnings for pension purposes — they cannot form the basis of pension contributions beyond the £3,600 non-earner limit.

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The Redundancy Payment and Tax-Free Allowance

Statutory redundancy pay (based on age, weekly pay, and years of service) and the first £30,000 of contractual redundancy payments are free of income tax and National Insurance.

Amounts above £30,000 are subject to income tax (but not National Insurance).

Can You Put Redundancy Pay into a Pension?

If the redundancy payment is not taxable (under £30,000) and you have no other earnings in the tax year, you cannot contribute the tax-free element to a pension and claim tax relief — it is not earnings.

If you have a redundancy package that includes payment in lieu of notice (PILON), the position is different. Since April 2018, all PILONs (contractual and non-contractual) are subject to income tax and National Insurance as employment income. PILON does count as earnings for pension purposes, potentially allowing a pension contribution from those funds.

Employer contributions directly from the redundancy settlement into a pension (rather than the cash to the individual) can be more tax-efficient — this is called an "employer payment into pension on leaving." These contributions are paid by the employer and are outside the £30,000 exemption test but are not subject to income tax or NI when paid directly into the pension. The employer gets corporation tax relief. This is a negotiating point worth raising with the HR department.

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Carry Forward: Making Up for Lost Contributions

If you return to employment or generate self-employment income after a period of redundancy, carry forward allows you to use unused annual allowance from the previous three tax years to make a larger-than-usual pension contribution.

How This Works in Practice

Suppose you were employed and contributing the maximum to your pension in 2022/23, 2023/24, but were redundant for most of 2024/25 and made minimal contributions. In 2025/26, having returned to employment or generated income, you can carry forward the unused allowance from 2024/25 (and earlier) to make a larger contribution — up to £60,000 (2025/26 AA) plus the unused amount from earlier years.

This is a powerful tool for individuals who want to rebuild pension savings after a redundancy gap and who have the income to support a larger contribution in a recovery year.

Compliance caveat: Carry forward requires the individual to have been a member of a registered pension scheme in each year from which they are carrying forward. Ensure you meet this requirement and that total contributions in the carry-forward year do not exceed your earnings for that year.

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Auto-Enrolment on Return to Work

If you take a new job after redundancy, you will be automatically enrolled into the new employer's workplace pension (provided you are between 22 and State Pension age and earn above the auto-enrolment threshold — £10,000 in 2025/26). Auto-enrolment happens within three months of starting.

You can choose to contribute from day one — you do not have to wait for auto-enrolment to kick in. Starting contributions immediately maximises the employer contribution and avoids a gap.

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Pension Considerations During a Redundancy Job Search

While unemployed and searching for a new role, there are several pension-related points to consider:

• Review deferred pension charges. If you have multiple deferred pensions from previous employers, check that charges are not eroding the funds while you are not contributing. High charges in old legacy pensions may justify a transfer to a modern low-cost SIPP.
• Consider consolidation carefully. Redundancy is a good moment to review all pension arrangements, but do not rush transfers without checking for protected tax-free cash, guaranteed annuity rates, or DB scheme benefits.
• Maintain your NI record. National Insurance gaps affect your State Pension entitlement. If you are claiming Jobseeker's Allowance or Universal Credit while unemployed, NI credits may be applied automatically. Check your NI record via the Government Gateway.
• Do not touch your pension pot early. Unless you are over 55 (rising to 57 in April 2028), accessing pension funds before normal minimum pension age results in unauthorised payment tax charges — a 40% unauthorised payments charge on the member, plus a further 15% surcharge where the unauthorised payments exceed 25% of the fund (up to 55% in total), with a separate scheme sanction charge on the scheme. This is one of the most expensive financial mistakes available.

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Redundancy and the Tapered Annual Allowance

If you were previously a very high earner subject to the tapered annual allowance (TAA), redundancy may open up more pension contribution headroom. The TAA reduces the annual allowance for those with adjusted income above £260,000. If redundancy takes your income below this threshold in the tax year, a higher AA may be available.

Equally, a large redundancy payment that is taxable could push income above the TAA threshold unexpectedly. Modelling the tax year's income and pension contribution capacity before making contributions is prudent.

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International Considerations: Redundancy Abroad

For UK nationals made redundant while working internationally, the pension position is more complex:

• Contributions made while working overseas: Whether those contributions received UK tax relief depends on whether the individual was UK tax resident and whether the contributions were to a UK registered scheme.
• Overseas employer pensions: If the employer contributed to an overseas pension scheme, the treatment on leaving depends on the scheme rules and the relevant jurisdiction.
• QROPS on redundancy: Redundancy from an overseas employer followed by a return to the UK could create a window for QROPS planning — or equally, trigger the overseas transfer charge on an existing QROPS.

These situations require specialist cross-border advice.

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Compliance and Risk Warnings

This guide provides general information about pension considerations in a redundancy situation. It does not constitute financial advice. Individual circumstances vary significantly — the right course of action depends on the type of pension, the value of the pot, your age, your tax position, other assets, and your plans for future employment.

Pension tax rules — particularly the annual allowance, carry forward, and contributions while non-earning — are subject to interpretation and may change. Defined benefit transfer advice above £30,000 requires an FCA-regulated financial adviser by law. Pension investments can fall as well as rise.

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How Global Investments Can Help

Redundancy creates both challenges and opportunities in pension planning. At Global Investments, we help clients — including internationally mobile professionals facing redundancy from multinational employers — to take stock of their pension position, understand the options, and make informed decisions without acting in haste.

We can help you review all your pension arrangements, understand any entitlements that may be at risk in a transfer, model the impact of contribution gaps on your retirement income, and plan how to rebuild savings efficiently once employment resumes.

Contact Global Investments for a confidential conversation about your pension strategy following redundancy.