Redundancy, the ‘R’ word, might be a term that we hear a lot more of over the next few months, owing to the current, and difficult, UK economic situation.
Being made redundant can be a turbulent and emotional time for most.
If you find yourself in this position, then it might be worth taking some financial planning measures early to ensure that you try and get the best from what will for some be a tricky situation.
First of all, you may receive a redundancy payment. The first £30,000 of this should be paid tax free, as long as it is a true redundancy situation. If your departure from work is not deemed to be a redundancy, such as a severance agreement, then the tax situation may be different. Please check this point before agreeing to leave an employer. Any balance above £30,000 will be taxed at your highest marginal income tax rate. As tax years start in April, and if we think that we are now into the summer, then we are three months into a tax year, as of early July. Therefore, if you add the potential payment above £30,000 to your earned income so far, you may well find that you will be taxed at 40% or 45%; however check this with an accountant or tax adviser because all of our circumstances will be different. Part of the payment you receive might be 'payment in lieu of service', and this is taxable as income.
Dependent on your situation, you may want to offset part of the tax on any excess redundancy payment by contributing to a pension. If you have an employer / workplace pension scheme, then you may need to arrange this before you leave service. Therefore, some early planning in the negotiation phase may well be worthwhile. Although this may be tax efficient, take account of your cash flow situation. Planning for your immediate future is usually vital.
With the potential of no income coming in for the short term, you will still need to meet the cost of your liabilities and this has to come first. You may want to check any policies that may pay out in the event of redundancy. Some of these plans require you to apply for State benefits and you may plan to arrange this anyway. Also remember that you may be losing other benefits by leaving your employer, such as death in service and ill health / medical insurance cover. You should check this to ensure that the protection levels you require are maintained.
Others may have reached an age where drawing pension benefits may be an option. Seeking good financial advice at an early stage is important to make sure that this planning is arranged correctly.
Whatever happens through the balance of 2020, we hope you stay safe.