3rd May 2022
Now we are approaching normality, there are still some challenges ahead. Even if a recession is not on the immediate horizon, some industries will face struggles in the coming months.
It’s a good idea to have a robust plan in place just in case your job is not as secure as you thought.
What Are You Entitled to from Your Employer?
If you are made redundant, you are entitled to at least one week’s notice (or more, if specified in your contract) and any holiday pay you have built up. You might be asked to work your notice period, or your employer might put you on ‘gardening leave.’
You could be entitled to a lump sum from your employer, which can help you to get back on your feet after losing your job. If you have been employed for at least two years, the statutory minimum lump sum is calculated as follows:
The age thresholds are based on your age during each year of employment, not necessarily how old you are at the point of redundancy. This can make the calculation more complicated than it initially looks.
Statutory redundancy pay is capped at £16,320. Additionally, the length of service on which your lump sum is calculated is capped at 20 years.
Your employer may offer statutory redundance pay, or you could have an enhancement to this depending on your contract. You should receive the higher of the statutory lump sum and the amount stipulated in your contract.
If your redundancy sum is £30,000 or less, you won’t pay any tax on it. The excess is taxed as income, or you can opt to put it in your pension.
There are some situations in which you can lose your entitlement to redundancy pay. If you resign, or are dismissed for misconduct before the end of your notice period, you will no longer be redundant as you have left your employer for a different reason.
Additionally, if your employer offers you a suitable alternative job (appropriate for your skills and pay grade) you may not be eligible for redundancy pay if you turn it down.
It’s a good idea to work out what you would be entitled to in the event of redundancy.
A Plan for Emergencies
Along with unexpected repairs and short periods of illness, the prospect of redundancy is one of the main reasons why it’s important to have an emergency fund.
You should keep at least 6 months’ worth of essential expenses in an easily accessible bank account. This means that if you are made redundant, you have some breathing space. This gives you the time and flexibility to find a suitable job rather than settling for the first one you are qualified for.
If you don’t have an emergency fund, your financial situation could become difficult very quickly. You might need to cut back on your expenses, dip into money earmarked for other purposes, take on borrowing, or even sell your house.
If you don’t already have an emergency fund, this should be your top priority.
Check Your Insurance
If you have income protection insurance or waiver of premium on your life insurance policies, these are designed to cover ill-health. It is unlikely that they will pay out in the event of redundancy.
There are some insurance plans which cover redundancy, but these are unusual now and can be very expensive. Additionally, the payout periods tend to be short (up to 12 months) and you won’t receive anything if you have reason to believe you will be made redundant before you apply.
While protection is an important part of financial planning, keeping an emergency cash reserve is a far more effective way of protecting against redundancy.
Dipping into Your Investments
Investments are for the long-term, and taking money out early can impact your financial plan. This is particularly the case if you withdraw funds during a downturn, as your capital won’t have the chance to recover from market volatility.
If you do need to draw on your investments, it is generally most efficient to take them in the following order:
Is Taking Your Pension an Option?
If you have a defined benefit pension scheme and are over the minimum retirement age, you might be able to take your pension early as part of your redundancy package. Of course, this applies in a minority of cases.
Most people have a workplace or private pension. You may be able to access this if you are over 55 (although this is rising to age 57). You can take a 25% lump sum, a taxable income, or a combination of both.
Taking taxable income from your pension can have implications if you return to work. You will pay tax on your pension, as well as any other income you earn within the tax year. Additionally, you will trigger the Money Purchase Annual Allowance (MPAA) which caps your future contributions at £4,000 per year.
Pensions are highly tax-efficient, so it’s usually a good idea to withdraw other investments first.
It’s worth seeking advice if you are made redundant and are considering taking money from your pensions or investments.
You may be entitled to State benefits if you are made redundant. This could include Jobseeker’s Allowance, Employment & Support Allowance or Universal Credit. You may also be eligible for Child Benefit.
Your entitlement will depend on your age, health, circumstances, family situation, assets, and any other household income.
You can check your potential entitlement at Entitled To.
State benefits might be less than you think, so it’s not a good idea to rely on them unless you have no other option.
Once you have clarified your financial position, you need to think longer term. You might find another job within a few months, or it could take longer. Consider any lifestyle changes you need to make if you end up out of work for longer than expected.
For many people, redundancy is just the nudge they need to start a new career, set up their own business, or transition into early retirement. Having a bit of financial flexibility means that you can take your time over these decisions and follow the best path for you.
Please don’t hesitate to contact a member of the team to find out more about financial planning.