Article How redundancy affects your pension

Redundancy can be a difficult and stressful experience, but it can also mark the start of a positive new chapter. Whether you decide to pursue the next stage of your career or wish to prepare for retirement, knowing what you can and can’t do with your current workplace pension could help you to navigate your next steps with confidence.

This information is based on our understanding of current taxation law and HMRC practice, which may change.

What happens to your pension when you’re made redundant?

If you’ve been made redundant, the workplace pension you’ve been paying into will remain yours. You won’t lose it because of a change in your employment circumstances. However, leaving a job or being made redundant doesn’t automatically mean you can access your pension right away. The normal rules around how and when you can access your retirement savings will still apply. This includes accessing your pension from age 55 and above (rising to 57 in 2028), and usually being able to take up to 25% of your pension pot as a tax- free lump sum.

What happens next will depend on the type of pension plan you were paying into while you were in that job. There are two key types of workplace pension – a defined contribution (DC) or defined benefit (DB) plan. If you’re not sure what kind you have, you can ask your employer or look at any documents your pension provider has sent you, like your annual statement.

If you have a defined benefit (DB) pension

If you have DB pension (more commonly found in the public sector) then you'll have to stop paying into it. The value of this type of pension pot is typically determined by the amount of time you've been working for your employer and your salary. We'll outline what you can do with your DB pension in the next section.

If you have a defined contribution (DC) pension

The only major change you'll see to your workplace pot if you have a DC pension is that your employer's contributions will stop. Unlike a DB pension, you may be able to continue making your own personal contributions – which we'll cover in the next section.  

What can you do with your workplace pension when you’ve been made redundant?

Depending on your circumstances and the type of workplace pension you saved into, you’ll usually have a number of options.  

1. Keep paying into your pension (if the rules allow)

If you have a DC pension, you might be able to continue making payments into the scheme and benefit from any government tax relief (money into your pension that would have been paid as tax) that you’re eligible for. The value of any tax relief will depend on your individual circumstances.

As mentioned, you won’t receive any more employer contributions after you leave your job. It’s worth noting that money paid into any of your pensions – including through personal contributions, an employer or third parties – all contribute to your annual allowance. This is the maximum amount that can be put into your pension savings each tax year before you have to pay tax on it. Currently, the annual allowance is £60,000.¹ If you start contributing to a new workplace pension while still paying into your previous workplace pension, make sure to keep note of the total amount being paid in across all your pension pots.

2. Pay your redundancy payment into your pension

You may be able to pay some of your redundancy payment into your workplace pension, but usually only if it’s a DC pension scheme. You'll likely need an agreement from your employer to do this.   

It's worth noting that your redundancy payment might be subject to tax, depending on how much you receive. As a general rule, the first £30,000 of a redundancy payment is usually tax-free, but anything above this may qualify for income tax.²

Your employer must provide you with a detailed breakdown of any tax information when making a redundancy payment, so this may help you in your decision-making. Again, be aware that paying any part of a redundancy payment into your pension will contribute to your annual allowance.

3. Transfer your pension

You may be able to transfer your pension pot into another workplace or private pension. Again, this option is usually reserved for defined contribution schemes.

However, combining pension pots isn’t right for everyone. You may lose features, protections, guarantees or other benefits – so make sure you compare products before combining. It’s also important to remember the value of your combined pension pot can still fall as well as rise,and the final value of your pension pot when you come to take benefits may be less than has been paid in. 

Any new funds you move your money into will have their own set of risks that will be detailed in the fund information available to you.

It’s up to you to decide if this is the right decision for you. If you’re not sure, speak to a financial adviser – there’s likely to be a charge for this. You can find a financial adviser near you by visiting the Government's MoneyHelper website.

4. Withdraw your money

Depending on your scheme’s pension rules, you can usually withdraw money from your pension pot if you’re aged 55 or over (rising to 57 in 2028), you might choose to withdraw some or all of the money saved in your pension pot.

However, when you start to withdraw from a workplace pension, there are some things to consider.

If you decide to stop working, this could impact your entitlement to receiving the full State Pension amount if you haven't built up enough qualifying years of National Insurance contributions.³ The income you get from your workplace pension may not fully replace your salary.

If you take a flexible income from a DC pension and continue to work at the same time, this may reduce the amount you (and your employer) can pay into your pension without facing tax charges. This is known as the Money Purchase Annual Allowance (MPAA). There are a few exceptions to the MPAA depending on the size of your pension pot and how you choose to take it – find out more on how this could impact you. The MPAA isn’t relevant when taking income from a DB scheme.

For more information on how a flexible income works, read the section ‘choosing a flexible income’ in our guide, Taking your pension benefits – your options.

5. Leave your pension as it is

You could choose to leave your pension where it is and wait until your retirement age to access your pot as an income. If you do this, it’s important to keep a note of your login details and keep your personal information up to date. This will help you to keep track and not lose sight of any savings you have. You can update your details by logging into your pension account or contacting your provider.

Take your next steps with confidence

The best option for you will depend on a range of factors, including the type of workplace pension scheme you’ve been paying into. Pension schemes are legally obliged to provide you with certain types of information about your scheme, so reach out to your provider if you have questions.   

Outside of your provider, here are some other sources of information and guidance: 

• As a starting point you might wish to read over the UK government’s official guidance on your rights and benefits entitlements. If you’ve been made redundant because your employer has gone into insolvency (when they can no longer pay its debts),  then you may be able to claim redundancy pay from the Insolvency Service, a government agency.  
• Citizens Advice also offer lots of resources to point you towards the right help if you’re facing redundancy and aren’t sure what to do next.
• If you’re over 50 years old you can receive free guidance from the Government-backed PensionWise service. 
• For personalised advice based on your individual circumstances, you might find it helpful to consult a regulated independent financial adviser to take you through your options. This will likely come at a cost, so make sure to do your research to find an adviser that can meet your needs. You can find an adviser through the MoneyHelper website.

By understanding your options, you can have a clearer idea of what will happen to your pension if you’re made redundant – and spend more time focusing on what you’d like to do next.