Redundancy or considering voluntary redundancy can be a difficult and confusing time. Losing regular income can create immediate financial concerns, while receiving a redundancy payment can leave you facing some important financial decisions to make. Should you keep your redundancy money in cash? Pay off your mortgage? Invest it? Put it into your pension? Or use it to support you while searching for your next opportunity?
There isn’t a single answer that is right for everyone. If you’ve been made redundant, or redundancy is a possibility, taking a step back and looking at your wider financial position can help you make informed decisions.
To help you understand the key financial consideration you should make, here are five key financial considerations to think about following redundancy.
1. Understand Your Redundancy Payment and the Tax Implications
The first step is to understand exactly what you will receive from your employer.
A redundancy package can contain several different payments, including:
- Statutory or enhanced redundancy pay
- Pay in lieu of notice
- Salary or wages owed
- Payment for unused holiday
- Bonus or commission
These payments can be treated differently for tax purposes.
Generally, qualifying redundancy and termination payments up to £30,000 may be paid free of Income Tax and National Insurance. However, other parts of your final payment, such as salary and pay in lieu of notice, are normally taxable.
Understanding how the package is made up can help you establish how much money you will receive and whether there are any tax planning opportunities.
Your overall tax position can also be affected by how much you’ve earned during the tax year and what happens to your income after redundancy.
Could redundancy create an opportunity for tax planning?
Potentially. Depending on your circumstances, you may want to consider whether some of your redundancy payment could be used towards pension contributions or other tax-efficient financial planning.
However, pension contributions and tax planning are subject to rules and allowances, so professional advice is valuable before making significant decisions.
The key point: understand your redundancy package and its tax treatment before deciding what to do with the money.
2. Work Out How Long Your Money Needs to Last
Once you know how much you are likely to receive, the next question is:
How long does your money need to last?
Finding another job may take time. You may want to take some time away from work, retrain, start a business or even bring forward your retirement.
Your redundancy payment therefore needs to be considered in the context of your wider income, savings and expenditure.
Start by working out your essential monthly expenditure. Then consider how much you already have in savings and investments and how much you may need to keep readily accessible.
Cashflow planning after redundancy
This is where cashflow planning can be particularly useful.
A cashflow plan can help you visualise how your finances could develop over the coming years and test different scenarios.
For example:
What if I’m unemployed for six months?
What if I accept a lower-paid role or work less hours?
What if I take a career break?
Can I afford to retire earlier than planned?
How much of my redundancy payment can I afford to invest?
Rather than simply looking at today’s bank balance, cashflow planning allows you to consider your financial position over time.
At Symmetria Financial Planning, we use cashflow planning to help clients understand how different financial decisions could affect their future.
The key point: before spending or investing your redundancy payment, understand how much you may need and how long it needs to last.
3. Review Your Pension Before Making Any Decisions
Redundancy can be a good opportunity to review your pension arrangements, particularly if you’ve worked for several employers. You may have several different pension pots, each with different providers, charges, investment options and benefits.
However, don’t automatically transfer or consolidate your pensions simply because you’ve left your employer.
Some older pension schemes can contain valuable benefits or guarantees that could be lost if you transfer them.
You should also consider how redundancy affects your wider retirement plans.
If you were expecting to work for another 10 or 15 years, losing your job could change your retirement timetable. Equally, if you’re already approaching retirement, redundancy could potentially provide an opportunity to consider whether early retirement or reducing your working hours is financially achievable.
Should you put redundancy money into your pension?
For some people, making a pension contribution could be worth considering, particularly where there are tax-planning benefits.
However, pension contributions are subject to allowances and rules, and accessing pension benefits can have wider tax and financial implications.
The key point: don’t make pension decisions in isolation. Consider your redundancy payment alongside your existing pensions and your overall retirement plan.
4. Decide What to Do With Your Redundancy Money
Once you’ve established how much money you have and how long you may need it to last, you can start thinking about what you should do with it.
There are several possibilities.
Keep it in cash
If you may need the money in the short term, keeping your redundancy funds readily accessible could be sensible as a financial safety net while you look for another job.
Pay down debt or your mortgage
Reducing expensive debt can be attractive option, particularly if you’re paying high interest rates.
Using a lump sum to reduce your mortgage could reduce your monthly outgoings and provide greater financial security.
However, you should consider any early repayment charges and whether using a large proportion of your available cash would leave you with insufficient emergency savings.
Invest it
If you don’t need the money in the short term, investing may be worth considering.
The appropriate investment strategy will depend on your objectives, investment timescale, attitude to risk and capacity for loss.
Money you might need within the next few months should generally be considered very differently from money you’re investing for 10, 20 or 30 years.
Put some into your pension
As discussed above, pension contributions may provide tax advantages for some people, but they need to be considered alongside pension allowances and your wider financial circumstances.
However, the is no single answer.
The key point: don’t ask simply, “Where should I put my redundancy money?” Ask, “What job does each part of my money need to do?”
5. Review Your Overall Financial Plan
The final consideration is to step back and look at the bigger picture. Redundancy can change much more than your immediate income.
It could affect your:
- Retirement plans
- Pension contributions
- Investment strategy
- Mortgage and debt position
- Tax position
- Personal protection
- Family finances
- Long-term financial goals
It may even cause you to reconsider what you want from the next stage of your life.
Perhaps you want to find another role immediately. Perhaps you want to take time away from work, start a business or explore whether early retirement is possible.
Could redundancy mean you can retire earlier?
This is a question worth asking, particularly if you’ve already accumulated substantial pension and investment savings.
A detailed financial plan could show that you have more flexibility than you realised. Equally, a financial plan may demonstrate that returning to work is important if you want to maintain your desired retirement lifestyle.
This is where cashflow planning and independent financial advice can be particularly valuable.
Rather than deciding based solely on the size of your redundancy payment, you can consider your pensions, investments, savings, expenditure and future income together.
The key point: Redundancy can present a fantastic opportunity to pause for reflection on your overall financial plan, with a professional financial planner providing important support.
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