"Facing redundancy can feel overwhelming and put a lot of pressure on household finances. But, getting in control of your finances and being aware of your overall financial position can help alleviate money stress and make you feel more in control of the future. Following a quick checklist can help you take stock of your overall financial position, check in on personal and professional goals, review what changes might need to be made and decide what’s next.
“There are plenty of free to use resources, such as the Money Advice Service, available for people looking for support. If you are dealing with a complex financial position it’s worthwhile seeking the support of a specialist financial planner or adviser.”
Tips from Shona Lowe at 1825 on what to consider if you are made redundant:
Take a look at your overall finances“Take a look at your overall financial position. This can be difficult and feel daunting but it is so important. You need to understand the full picture – savings, investments, debts, incomings, outgoings. The whole lot.”
Grab a pen and a blank piece of paper“Next, get a pen and blank piece of paper. Draw a horizontal line from now into the future, considering where you want to be in 10 years’ time. Think about the big events, what you want your life to look like and the income you need to make this happen.”
Now, challenge what you have written down“Now you have your ideal you need to think about what is possible. Consider how recent events might have changed this and what you value as important. Review your financial position and then revisit the goals. What can you bring forwards? What needs to be pushed back? What will be too much of a stretch financially? Can you scale this back?”
Decide what to do with your redundancy payment“The next thing is to decide what to do with your redundancy payment. This depends hugely on personal circumstances. You may have another job to go to so might want to invest this money for a longer-term goal. If you are retiring, you might want to invest some and keep hold of some for spending now. You might know you need the money immediately to help you meet day to day living costs or you just might not know yet.”
Consider paying off debt“If you are in a position where you don’t need to make full use of your redundancy payment due to another income source or savings, consider whether it’s time to pay off any debt. The interest you are charged on debts can often be higher than the interest paid on savings so paying down debt can make financial sense in the longer term.”
Don’t forget about your taxes
"Much will depend on how much your redundancy payment is, your overall tax position and whether your employer will contribute to your pension instead of making some or all of the payment to you. Up to £30,000 of a lump sum redundancy payment will be tax free but tax and national insurance contributions may be payable on non-exempt amounts such as any paid holiday, payments in lieu of notice or the cash value of any assets you receive as part of your package, for example a company car, mobile phone or computer.
For most people, the tax position should be taken care of by their PAYE code and the correct amount of tax will be payable as it is taxed at source like a normal salary payment but you should still check to make sure. If it isn’t right and you have a balance to pay or a refund to claim, you’ll need to complete a tax return. If your affairs are complex, it may be helpful to have this completed by a professional.”
Laws and tax rules may change in the future. Your own circumstances also have an impact on tax treatment.
Check out your pension
"Make sure you understand your existing pension and know how much have saved – get your paperwork together, speak to your provider or adviser, check the value of your pension, where it is invested, and importantly establish the type of pension you have. It’s also worth understanding whether it’s possible for your employer to put some of your redundancy payment into your pension.”
Often people decide to leave their pension in their current scheme and leave it grow over time. Depending on how long you have until retirement it’s worth thinking about where the pension should be invested and the level of risk you are able to take. If you are younger you might want to take on a bit more risk, as you could have time to ride out any market ups and downs, but if you are older you might want to have less risk, so you know you savings will have a better chance of holding their value for when you want to access them in the near future. Your pension is an investment so it’s important to remember that investments can go down as well as up and you may get back less than you paid in.”
Think about other benefits your employer offers“A pension isn’t usually the only benefit that your employer will have offered. Many also provide benefits like private health care or life insurance so it’s important you know not only what pension you have but also what benefits you had in your previous job. And then you need to know what you will be eligible for in your new role. The cost of the benefits you want to keep or start which you need to pay for and the pension contributions you want to make should be factored into your financial planning and it can be useful to compare the products of different providers if you’re arranging benefits yourself.”
Make sure your other financial affairs are in order
"As well as your current finances you should also think about your other financial affairs. An up to date Will, Power of Attorney and pension nomination are often at the bottom of the priority list but getting these in place will give you the peace of mind that you’ve taken control and set out what you want to happen.”
This blog is for information purposes only and should not be regarded as financial advice. Information is based on our understanding in September 2020.