Facing redundancy can be an intimidating time, therefore it is important to be aware of your rights and have a clear overview of your finances.
WEALTH at work have provided an overview of some of the key areas that employees will need to understand if they are made redundant.
1. Redundancy Entitlement – If your employer makes your job redundant and you are forced to leave the company, you may be entitled to redundancy pay. Redundancy packages are not set in stone, they vary according to the company but are also based on age, length of employment, and job role. For those who have been in the same job for at least two years, your employer is usually legally required to pay you. The legal minimum is called ‘Statutory redundancy pay’ however it is vital that you check your employment contract as you may be entitled to more. There are also plenty of online resources such as GOV.UK or Money Helper, which can help you understand your rights.
2. Taxation on redundancy payment – It is important to understand how much you will actually receive once tax has been paid. Usually, the first £30k is tax free, with anything over this being added to your income and charged at the marginal rate. Please note, employee National Insurance is not deducted from a redundancy payment.
For example, someone who has an annual salary of £36k, has earned £15k so far this tax year and is offered £50k redundancy would owe £4,000 in tax on their redundancy pay.
This is because the first £30k of their redundancy pay is tax free but the remaining £20k is taxable. As they have earned £15k so far this year, even with the £20k added to this, they are still within the basic rate tax band, so tax of £4,000 is due on the redundancy pay (20% of £20k). Please note, individuals could end up in a higher rate tax bracket, depending on their income and redundancy pay.
3. Review financial position and budget – Work out what assets you have, pensions, savings, ISAs, property and investments, and what liabilities you have e.g. mortgage, debt, childcare, insurance and utility bills. Then look at any other household income and expenses. If the amount of money you need each month is more than the amount you have coming in, you can then work out what action you need to take to cover your costs. Money Helper has a great budget planner.
4. Debt repayment – If you can afford to, it might be worth using some of your redundancy payment to pay off expensive debts. There are many different types of debt with varying rates of interest. Credit cards and overdrafts can have rates of 18 – 40%, with payday loans having rates of 1,500% and more!
For example, a debt of £3,000 with a rate of 18% APR, could take 10 years and 10 months to pay off if paying £50 a month, with total interest of £3,495 paid. If that monthly payment was increased to £100 a month, the debt would be paid off in 3 years and 4 months, and interest paid would be only £908. If this was increased to £300 a month, the debt would be paid in 10 months, with total interest of £252 paid.
5. Mortgage overpayment –Mortgage interest rates tend to be significantly lower than other debts, and can include payment holidays for those who are made redundant. However, if they don’t have other debts, employees may want to consider overpaying on their mortgage. For example, with a £200,000 mortgage which has a 3% rate of interest over 25 years, an individual could pay £84,527 in interest over the 25 years. If this is overpaid by £200 a month, the interest reduces to £62,905 over 19 years. If this is overpaid by £400 a month, the interest reduces to £50,209, over 15 years and 6 months, and if this is overpaid by £600 a month, the interest reduces to £41,825 over 13 years.
6. Can you afford to retire? – If you are nearing retirement age, you may consider the idea of retiring early. Depending on your circumstances, this may be more achievable than you think. An individual could use their redundancy payment or pension tax free cash to pay off any outstanding loans and mortgages, and as a result they may be able to maintain their standard of living. For example, someone earning £30,000 per year, once they have paid income tax (£3,006), National Insurance (£1,804), pension contributions via salary sacrifice (£2,400), mortgage (£6,000) and loans (£2,400), may end up with a disposable annual income of around £14,390. Realising that you may only need a retirement income of less than half of your salary to maintain your standard of living can be an eye opener, and make retirement a more realistic option.
7. What happens to your company pension? – It is fine to keep your pension with your previous employer and it will remain invested and safe until you retire. Some people prefer to move their pension to their new workplace pension scheme, or a private pension. There are benefits to this in that all pensions are kept together in one place, however there can be a cost to transferring a pension; investment charges are not all the same and may not be lower, and the range of investment options vary between schemes. Make sure you check these things before moving your pension.
8. Pay more into your pension – If you can afford to do so, it may be worth considering paying some of your redundancy payment into your pension to boost your retirement savings. There are limits on the tax relief you can receive from pension contributions each year, so it will be important to check these carefully first. For those approaching retirement, this may be a particularly attractive way of providing a final boost to the value of their pension pot.
9. Beware of scams – Unfortunately, there are some really unscrupulous people in the world, who won’t think twice about scamming someone out of their redundancy pay. If you are looking for somewhere to keep your redundancy pay beyond just your current account, make sure you do your research. Before handing over any money, always check the firm is regulated by the Financial Conduct Authority (FCA).
Jonathan Watts-Lay, Director, WEALTH at work, comments;
“For organisations that are making redundancies, it’s really important that the workforce receive the appropriate support so they understand how it will impact their finances. It can be a really difficult time and it is crucial that they get help around areas such as how to budget, manage debt and cut down on spending and bills. Employees will also need to understand how much they will actually receive from their redundancy pay after tax, how to make it last if they don’t get a new job quickly, or how it could help them afford retirement when perhaps they thought it wasn’t a possibility.”
He adds; “People need help when they are told they are losing their job, and it’s encouraging that many leading companies already have redundancy support programmes in place and providing financial education, guidance and regulated financial advice for their staff to help them navigate these issues at a time when financial wellbeing is so important.”