Lost your job? Financial top tips
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. There are ways to minimise the financial impact of 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. Resist the urge to splurge, review all your outgoing payments immediately and cancel any non-essential or discretionary costs. 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 and any remaining cash will be taxed as income, although it won’t be subject to national insurance deductions.
Using a pension scheme
This means that depending on the size of your payment, the non-tax-free portion could be taxed up to 40% 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 could pay some of your redundancy payment into a pension scheme, for example. 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
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.
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.
ISAs shelter up to £20,000 from tax. The interest rates aren’t great, but it can be a good place to hold cash while you’re deliberating. If the money may stay in place for the longer-term – say, 3-5 years – it may be worth considering a stocks and shares ISA. If you’d like to go the investment route but are not sure where to invest the money, it can be worth discussing your options with an independent financial adviser (IFA).