What happens to active contributions
Workplace pension contributions stop at the termination date. Both your contributions and your employer's stop simultaneously. The implications:
- No more employer matching going forward (unless you have a new employer's scheme)
- No more salary-sacrifice tax saving on regular contributions
- Your accumulated pot stays where it is — invested in the same fund choices
- The pension scheme continues to charge fees (typically 0.3-0.8% per year)
You have three options for what to do with the pot:
- Leave it in the previous employer's scheme — easiest, no action required. Some schemes have higher fees for ex-employees.
- Transfer to a new employer's scheme — usually free, but the new scheme's investment options may be different.
- Transfer to a SIPP (Self-Invested Personal Pension) — more investment choice, sometimes lower fees, but more responsibility.
The right choice depends on the scheme's quality, fees, and your investment preferences. Pension Wise (free 60-minute session for over-50s) is a good starting point.
The pension-sacrifice optimisation — the biggest move
For any redundancy package exceeding £30,000, sacrificing the above-threshold portion into pension is typically the highest-value tax move available.
How it works:
- Before termination, you ask your employer to redirect part of your above-threshold redundancy into your workplace pension
- The redirected amount goes to pension instead of being paid out
- Both Income Tax AND National Insurance are saved on the sacrificed amount
- The pension contribution counts against your annual allowance (£60,000 for 2026/27)
The tax saving for a higher-rate earner:
A £75,000 redundancy package (£30,000 tax-free + £45,000 above-threshold):
Without sacrifice: - £30,000 tax-free - £45,000 above-threshold at 40% = £18,000 Income Tax - Net redundancy: £75,000 - £18,000 = £57,000
With £45,000 sacrifice (assuming annual allowance headroom): - £30,000 tax-free (cash) - £45,000 sacrificed → goes to pension before any tax - Tax: £0 on the sacrificed portion - Net redundancy: £30,000 (cash) + £45,000 (in pension)
Effective tax saving: £18,000 — versus taking it all as cash.
For an additional-rate earner (45% tax), the saving on the same £45,000 sacrifice would be £20,250.
Constraints on pension sacrifice
Three things limit how much you can sacrifice:
1. Annual allowance — £60,000 for 2026/27
Total contributions for the year (employer + employee + sacrificed redundancy) cannot exceed £60,000 without triggering an annual allowance charge.
If you've already had substantial contributions during the year, your sacrifice headroom may be smaller.
2. Tapered annual allowance — for high earners
If your adjusted income exceeds £260,000 in the tax year, the annual allowance tapers by £1 for every £2 of income above £260,000, down to a minimum of £10,000 at £360,000+.
Big redundancy packages can push total income into the tapered band, reducing your sacrifice headroom in the same year you're trying to use it.
3. Carry forward — up to 3 prior years' unused allowance
If you have unused annual allowance from the previous 3 tax years, you can carry it forward to increase this year's headroom. For someone with low recent pension contributions, this can mean up to £180,000 of total contribution capacity in one year (this year's £60k + 3 years × £40k from prior years' tapered allowance, though the prior 3 years also have to have been unused).
The pension access timing question
Sacrificing into pension means the money is locked up until you can access it:
- DC pensions: age 55 (rising to 57 in April 2028)
- DB pensions: scheme-specific, typically 55-60
- Earlier access in cases of serious ill-health
If you're 40 and you sacrifice £45,000 into pension, the money is locked for 15+ years. The tax saving of £18,000 is real, but the cash isn't accessible.
For over-55s, the lock-up window is much shorter and the trade-off shifts strongly toward sacrifice.
Worked timing comparison
A 45-year-old higher-rate taxpayer with a £60,000 redundancy package (£30k tax-free + £30k above-threshold):
Option A — take it all as cash: - £30,000 + £18,000 (= £30k × 0.6) = £48,000 net immediately - Invested at 5% real return for 10 years: ~£78,000 at age 55
Option B — sacrifice £30k into pension: - £30,000 cash (£30k tax-free portion) - £30,000 in pension, growing tax-free - At 5% real return for 10 years: pension worth ~£48,900 - 25% tax-free at age 55: £12,225 + £36,675 taxable
At age 55, Option A: £78,000 net. At age 55, Option B: £30,000 (already taken) + £12,225 (tax-free pension) + £36,675 × ~0.8 if drawn at basic rate = £71,565.
For mid-career earners, the cash-now option often wins narrowly when investment returns are factored in. The sacrifice becomes more attractive (a) at higher tax rates, (b) for older workers closer to access age, (c) if the cash would otherwise be spent rather than invested.
Defined benefit (DB) pensions
If you're in a DB scheme, redundancy doesn't change the pension you've earned to date — your accrued rights are preserved.
Some DB schemes have specific redundancy provisions:
- Early retirement option: access DB pension at 55+ without the usual actuarial reduction
- Enhanced redundancy linked to scheme: some employers offer additional pension top-ups as part of redundancy package
- Cash equivalent transfer value (CETV): option to transfer DB pension to a SIPP — usually inadvisable but available
If you have a DB pension and are made redundant, ask the scheme administrator specifically about redundancy-triggered options. The DB scheme rules are scheme-specific and often more generous than the standard contractual redundancy.
Active pension during notice period
If you're working your notice (not PILON), pension contributions usually continue at the same rate. Same for garden leave.
If you're on PILON (employment ends immediately), pension contributions stop at termination. The PILON itself is fully taxable and doesn't carry pension matching.
Tip: if your employer offers PILON but you want pension matching for the notice period, you can sometimes negotiate "working notice" instead and keep contributions flowing. Discuss with HR.
Auto-enrolment and the new employer
When you start a new job, auto-enrolment kicks in once your earnings exceed £10,000 per year. You'll be enrolled into the new employer's workplace pension automatically, typically within 3 months.
You can consolidate your previous workplace pensions into the new scheme if it accepts inbound transfers — usually free, but check fees. Or leave them in their respective schemes if the investment options are reasonable.
Practical sacrifice request
To set up pension sacrifice on your redundancy:
- Confirm pension scheme accepts large lump-sum salary sacrifice contributions (most workplace schemes do; some have caps)
- Confirm annual allowance headroom with your scheme provider — they may have a calculation tool
- Request the sacrifice in writing to HR/payroll — must be agreed before termination
- Verify the redundancy offer breakdown explicitly shows the sacrificed portion going to pension
- Check the final payslip confirms the sacrifice executed correctly
Time is the constraint — once termination happens, sacrifice is no longer possible. Get the agreement signed during the consultation period, not at the last minute.
Practical checklist
- Identify your above-£30,000 redundancy portion — that's the sacrifice candidate
- Check pension annual allowance — typically £60,000, less if you've contributed heavily already or if income exceeds £260,000
- Calculate the tax saving — your marginal rate × the sacrificed amount
- Weigh cash-now vs pension based on age, alternative investment returns, and access timeline
- Request sacrifice in writing during consultation, not at termination
- Consider DB scheme options if you have one — redundancy-triggered early access can be valuable
- Audit pension consolidation afterwards — multi-scheme situation may simplify with consolidation
In short
Pension sacrifice on the above-£30,000 redundancy portion is typically the single highest-value tax move available — saving 28-47% in Income Tax + NI depending on your tax band. Constrained by the £60,000 annual allowance (or tapered amount for high earners) and the pension access age (55, rising to 57). Defined benefit schemes have their own provisions worth checking. For the broader cluster see the redundancy hub → and redundancy tax →.