What’s the best way to manage my redundancy pay and savings?

As the global pandemic continues and unemployment continues to rise Zoe Bailey, Chartered Financial Planner and Director at Tilney, looks at the options available to those who find themselves at risk of redundancy.

“For anyone facing redundancy, it is obviously a huge shock, but there are a number of points you need to address sooner rather than later.

“You should receive payment in lieu of notice, so it’s important to dig your original employment contract out and look at what your notice period is. If you don’t have the contract to hand, speak to your HR department. At this stage, if it hasn’t been offered already, you may be able to ask for gardening leave. Having this time off is a great opportunity to take a well-earned break and focus on assessing your redundancy package.

“Next, make sure you know exactly what your redundancy pay entitlement is. There are rules around the amount of statutory redundancy pay and these are set out clearly on the Government’s website but many companies go above this figure.

“It’s always worth considering if you are in a position to negotiate a better redundancy package. This is where it is beneficial to speak to an employment solicitor to discuss your options.

“Following redundancy, you need to think about where you are in life and for how long you need to keep working:

• You might be thinking of retiring within the next couple of years or so and the redundancy, and redundancy package received, might just bring forward your retirement date
• If you’re considering retiring within the next five to ten years, what I often see is people going into consultancy or becoming self-employed to top up their earnings and fund a comfortable retirement in the not too distant future
• If you’re 10 plus years away from retirement, you might want to take a small career break, but you will more than likely be looking for a new role.

“If you are not at the age or in a position to retire, you should take the time now to work out what your current financial situation is and how it will change due to the loss of employment income but make sure you include the redundancy payment that you will received. When you review this payment it might look like a lot of money on paper however the best way to view it is against your monthly outgoings. Calculate how many months this can support you for, as if it were your monthly income, and place it in a separate account transferring only what you need each month. Otherwise you may find that after a few months you will be left with less money than you initially thought. This may then put undue pressure on your job searching.”

“You can often make some changes to your outgoings quite quickly and easily. Check your bank statements carefully to look out for any regular payments and subscriptions that can be paused, reduced or cancelled. Many people don’t even realise they have some of them, so cancel these where you can. Shop around for better deals on your essential expenditure on things like energy bills and car insurance. There are plenty of cost comparison websites so it’s worth taking a look.

“The tax-free threshold on a redundancy payment is set at £30,000. The tax on any amount over this threshold is set at your marginal rate of income tax. There are ways that you can mitigate this tax on a redundancy payment. One of the most common ways to do this is to make an additional pension contribution from your employer before you even receive this redundancy payment, through a salary sacrifice arrangement. You can speak with your HR representative to help you enact this. The maximum that most people can pay into a pension and get tax on relief is £40,000 (as of the 2020/21 tax year) not accounting for any unused carry forward allowances. However, you personally cannot pay in more than your annual salary. This salary is generally based on that from your employment. Please note allowances are tapered down for higher earners. You should seek professional advice if you are in a position to consider this.

“An area often forgotten about during the redundancy process is what you should do with your company pension. Depending on your circumstances, you may want to make some changes to it or even think about transferring it to a new employer’s company pension when you find work or personal pension. Alternatively, it might be appropriate to draw on your pension now if you are 55 or over. Following the 2015 pension freedoms, you have total control over how you access your pension. By drawing on your pension now, this may help you cover the loss of income from your employment.

“Following your redundancy, you may also need to think about how you are going to pay your mortgage. There may be some Government-backed mortgage holidays available to you but if you are in any doubt about how you are going to pay your mortgage, you should contact your mortgage provider immediately for more help and support.

“It’s also important to identify other shortfalls which may have resulted from your redundancy. These are likely to include loss of benefits which will end when you leave the company. The most common examples are death in service life cover, private medical insurance or income protection.

“Another large outgoing that you may have is school fees. If you are concerned about paying the fees, think about contacting the school directly to discuss your options. This may include deferring fee payments or applying for a charitable grant, but each school has their own set of rules surrounding fee payments.

“By closely looking at your incomings and outgoings, you can understand the impact of the changes on your life. It’s important to remember the distinction between what you want to do and what you need to do. While you might want to keep your lifestyle and outgoings exactly how they were before, or take time out from work and use your redundancy pay to support this, you should look at how feasible this it as you may in fact still have a mortgage to pay and children to support. Also if you wish to take early retirement and travel the world as soon as we can again, that is great, however just ensure that this redundancy payment or your retirement fund already built up, is sufficient for this and to be able to continue to support you for life. The reality here is you may need to carry on working for a bit longer or a lot longer to ensure you can cover your outgoings and fund a more comfortable retirement in a few years’ time, and you may need to use your redundancy pay to cover your outgoings if you can’t get a new job immediately. Speaking to a financial planner will help you understand your long term personal situation and all the options available to you at this time.”