Your Money - Your Future
How to Navigate Redundancy with a Robust Financial PlanBack to News & Views
The world has changed in recent months, and many people have discovered that their jobs are not as secure as they once thought.
It remains to be seen how we will emerge from the pandemic, both as a society and as an economy. Redundancy is a significant concern across a number of industries.
While a financial plan may not have all the answers, particularly when so many people are in the same situation, it is certainly reassuring to know you have contingencies in place.
A robust financial plan can help you decide on your next steps. This can make the threat of redundancy less daunting.
The Importance of an Emergency Fund
Step one in any financial plan is to make sure that you have an emergency fund in place. This should cover at least three months’ essential expenditure, although ideally six months’.
The prospect of redundancy is far less worrying if you know you have six months to find another job. This is even enough time to add to your skills, or enhance your CV by doing voluntary work.
There are other benefits to having an emergency fund:
- · You have the means to cover your costs if you are unable to work due to illness.
- · A major repair or emergency purchase is no longer a source of stress.
- · There is no need to go into debt to cover unexpected costs.
It can be challenging to get into the habit of saving regularly, but even small amounts help.
Reducing your outgoings not only helps you to build up an emergency fund, but also means that you are in a less vulnerable position if your income drops.
Your Redundancy Lump Sum
It is worth checking with your employer if you would be eligible for a redundancy lump sum. You should be entitled to this if you have been employed for at least two years.
The statutory minimum redundancy pay-out is:
- · Half a week’s pay for each year of service if you are under 22
- · A week’s pay for each year of service if you are aged between 22 and 40
- · A week and a half’s pay for each year of service if you are 41 or over
The above is calculated based on how old you were during each year of service, not necessarily your age when you are made redundant.
Statutory redundancy pay is capped at £16,140 (£16,800 in Northern Ireland). Length of service is capped at 20 years and may result in a lower lump sum.
You are entitled to at least one week’s notice (which you may, or may not be required to work), as well as accrued holiday pay.
You may be entitled to a higher amount of redundancy pay as specified in your employment contract.
The first £30,000 of any redundancy lump sum is free of tax.
Will Your Insurance Pay Out?
Most protection plans, such as income protection contracts, do not pay out in the event of unemployment. They are intended to cover long-term ill-health.
You may have waiver of premium on your insurance and pension plans. This is also intended to cover periods of ill-health, and usually does not include redundancy cover.
It’s possible that you have some level of unemployment insurance on your mortgage or other debts. However, this often comes under the umbrella of ‘payment protection insurance’ (PPI). Following the mis-selling scandal a few years ago, this is rarely sold now. It was deemed to be unsuitable for most consumers and often over-priced.
Some short term income protection plans are available, which do cover redundancy. It is important to seek advice to determine if this is the best option for you. This type of plan will not pay out if you have reason to believe you may be made redundant before you apply. The cover can be expensive, with pay-out periods limited to 12 months.
Generally it is better to build up an emergency fund than to rely on insurance for what is, hopefully, a temporary setback.
Pensions and Investments
Pensions and investments are for the long-term. You should only consider investing money if you are prepared to leave it for at least five years. Otherwise the swings in the market make it more likely that you will end up with less than you paid in.
However, plans can change, and you may need to access some of your longer-term funds if you are made redundant.
It is worth seeking advice to ensure that you withdraw money in the most efficient way. For example:
- · Cash and lower risk assets should generally be withdrawn first.
- · Taxable investments (such as shares and investment accounts) should be drawn before tax-efficient investments such as ISAs.
- · Pensions should be drawn last if possible. This may not be a choice, as you can only access your pension funds if you are over 55.
- · If taking money from a pension, it may be more efficient to withdraw tax-free cash rather than taxable income. There are two main benefits to this:
o Withdrawing taxable pension income triggers the Money Purchase Annual Allowance (MPAA) and limits future pension contributions to £4,000 per year. If you plan to return to work, and contribute more to make up for lost time, this could impact your plans.
o If you start working again in the same tax year, taking pension income (rather than tax-free cash) will increase the amount of tax you pay over the year.
Your Longer Term Plans
The current situation has encouraged many people to think about their long term plans. It could be worth looking into increasing your value as an employee, for example by undertaking training, adding some additional skills, or getting to know more people in the industry.
Perhaps redundancy would be a relief rather than a burden, particularly if you are already close to retirement. You may decide that you can achieve your desired lifestyle with less than you thought.
Alternatively, enforced time at home (or an exceptionally stressful time at work) could guide you into a career change. While the pandemic has resulted in many industries struggling, others are busier than ever.
Or you might want to consider another path entirely. The global crisis may inspire you to start a business where your future is entirely in your own hands.
Please don’t hesitate to contact a member of the team if you would like to find out more about financial planning.