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The Your Money guide to redundancy

Kit Klarenberg
Written By:
Kit Klarenberg
Posted:
Updated:
30/03/2015

Losing your job can bring tremendous financial and emotional uncertainty. How can you help minimise the impact?

Even if you find a new job quickly, being made redundant means that for an indeterminate and sometimes lengthy period, you’ll  be spending more than your income. For some, redundancy can provoke a major revaluation.

However, redundancy could also represent a golden opportunity. This guide is intended to help readers minimise the financial impact redundancy – potentially turning it into a professional advantage.

The bitter pill of redundancy is often sweetened by a substantial severance payment; for some, this may be the most significant lump sum they’ve ever received. Some may wish to soothe their smarting self-esteem by splashing out, or placing money in investments – however, Lee Robertson of Investment Quorum urges redundancy payment recipients to resist the urge to splurge. “No matter the size of your redundancy payment, you must review all your outgoing payments immediately,” Lee says. “Cancel any non-essential or discretionary costs, and consider taking a payment holiday on your mortgage if the option is available to you.”

There are, however, financial considerations relating to a redundancy payment that require immediate action. “Only the first £30,000 of a redundancy payment is tax-free,” notes Danny Cox of Hargreaves Lansdown. “Any remaining cash will be taxed as income, although it won’t be subject to national insurance deductions.”

This means that depending on the size of your payment, the non-tax-free portion could be taxed up to 40 per cent depending on your income for that year. It could even push you into a higher tax bracket. However, there are ways to insulate your severance package from taxation. “Your employer should offer you the choice of having some or all of your redundancy payment paid into a pension scheme,” Danny says. “If you’re not given this option, ask for it. An employer is not obliged to agree to the arrangement, but most will.”

“This arrangement can be very tax efficient,” Danny continues. “However, it’s important to note that money paid into your pension cannot be accessed before you reach the age of 55.”

Of course, this option is only practical for those who can survive without ready access to their full redundancy payment in the short/medium-term.

Consideration of your debts should form part of an outgoing payments assessment. Rank them in order of importance, and move to reduce or pay outright the ‘priority’ debts – credit cards, mortgages, loans, responsibilities where non-payment could mean losing your home, ending up in court or having your heating cut off, and debts with the highest interest rates. “While alleviating debt may not be as alluring as buying a new car, or placing the payment in an ISA or other interest-accruing product,” says Danny, “the cost of most debts will exceed any interest you might earn.”

However, it is also important not to go overboard with debt repayments. After all, if you have no idea how long you’ll be unemployed, you have no idea how much money you’ll need to cover living expenses during your period of joblessness. “Beyond day-to-day costs, you may need to relocate to find a new job – or, you may wish to keep the option of retraining to increase your employability open; in either case, you’ll need access to a decent chunk of your redundancy payment,” says Lee.

Retraining, relocating or investing are all worth considering However, your next step should be to place what remains of your redundancy payment into a high-interest savings account, while you ponder what to do with the money. “Interest rates may be low at the moment, but an ISA shelters up to £15,000 from tax,” says Danny, “which means it is still the best place to put money when you’re deliberating.” This total can be split between cash and shares ISAs – cash ISAs are better if you require ready access to the money, shares ISAs if you can go without the money for five years or more.

The £15,000 maximum ISA deposit also means that you’ll need to find somewhere else to shelter your funds if the remaining money from your payment exceeds this total. “In such a case,” says Lee, “the time has come to look at other solutions, including shares and assets such as property.”

If you’d like to go the investment route but are not sure where to invest the money, Lee recommends speaking with an independent financial adviser (IFA). “What constitutes a good investment depends on your own circumstances, your own attitude to risk, and the condition of the wider economy,” Lee remarks. “As a result, general recommendations should be avoided – only an IFA can give you bespoke guidance, so seek one out.”


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