Whether you are currently facing uncertainty at work or simply want to feel more prepared for any future changes, reviewing your financial circumstances may help you feel more secure during challenging times and better prepare you for what may lie ahead.
If you have been in the same job for at least two years, your employer is obligated to pay you redundancy money. The legal minimum is called “statutory redundancy pay”, however your employer may be able to go above these requirements and offer you enhanced terms.
You may lose other valuable benefits when you leave your employer, such as private medical insurance, company car and protection such as death in service cover, and you may have to budget for replacing these.
If you are made redundant, any settlement may be a mix of redundancy pay and other amounts, therefore it is important to understand what is being offered to you. . However, anything above £30,000 as well as holiday pay, pay in lieu of notice and any other amounts that are considered “pay” rather than compensation for the job loss are taxed as normal with income tax and National Insurance deductions.
Once you know what is offer on to you, there are three main steps that you can follow to help you take control of your future:
1) Understand and track your income and expenses
It is important to understand your own personal budget by clearly listing all your existing income and spending. Look closely at your recent spending and separate it It can be easy to underestimate how much you spend each month, and once you know how much you are spending, you can start thinking about where you could make reductions so that you can adjust towards the loss of income.
2) Review your financial commitments and protections
If you have any debts, mortgages or other financial commitments, consider whether you can afford to repay any of these commitments early, but watch out for any early repayment charges. Check to see if you have any insurance policies that may pay out for redundancy. You can also contact your lender if you feel that you are going to struggle to keep up repayments.
3) Assess your plans and consider your next steps
Have a think about where you are in life and how long you may need to keep working.
Redundancy might prompt you to reassess your plans – whether that includes a career break, retraining, or considering retirement. It’s important to weigh up your options carefully.
A financial planner can support you in creating a plan that reflects your personal circumstances. When creating a personalised plan, a financial planner will consider all of your income, assets, investments as well as your redundancy package alongside any outgoings, such as a mortgage, household bills or school fees. For example, when any potential income from existing investments or pensions is taken into consideration alongside the redundancy pay you receive, it might indicate that stopping work earlier than planned could be an option for you should you wish to.
On the other hand, it might be that although you may receive a reasonable redundancy settlement, you have a mortgage and are putting children through university, so you may need to continue working. You may even need to use the cash from the settlement to plug any holes in your income until you get a new job or learn new skills.
4) Review your existing pensions
An area often forgotten about during the redundancy process are your existing pensions. If you are aged 55 or over, you may be considering accessing your pension to cover a shortfall in income. A financial planner can help assess whether this is appropriate for your circumstances, and discuss alternative options with you. A financial planner can also suggest changes to consider such as comparing any investment options available or transferring it to a different provider if your existing pension doesn’t give you the flexibility needed for your plan to be a success.
Dependent on your situation, you may also wish to consider reducing part of the tax on any excess redundancy payment by contributing some of it to your pension. If you have an employer pension scheme, then you may need to arrange this before you leave your job as part of any negotiations. Although this can be tax efficient, a financial planner will take account of your personal situation to see if this is best for you. Planning for your immediate future is vital and it’s important to make sure you have enough money available in the here and now.
Although not exhaustive, these steps may help you feel more in control during a challenging time and support you in planning your next steps.
Written by Peter Hope, Financial Planner at Acumen Financial Planning
Acumen Financial Planning Ltd is authorised and regulated by the FCA, FRN 218745.
The content within this text is for information purposes only and should not be regarded as advice.