Redundancy-ready: Maximise, don’t sacrifice, your payout

The government made a last-minute U-turn in December, declaring that the furlough scheme would be extended until the end of April 2021, giving businesses and employees continued access to financial support in the first few uncertain months of the new year.

The ongoing impact of the global pandemic means that more redundancies are inevitable in the near term, and while getting a lump-sum payment can help to soften the blow of a job loss, figuring out how best to use it can be a bit of a minefield. We help to make sense of the options available to you.

Hope on the horizon

Both Pfizer-BioNTech and Oxford-AstraZeneca announced in late 2020 that their respective vaccines had proven to be around 90% effective and were subsequently approved for widespread use, providing a chink of hope on the long COVID-19 horizon. However, we’re still very much in the eye of the storm, and it’s wise to remain cautious as we continue to feel the many reverberations from the viral outbreak.

One such knock-on effect has been seen in the wave of redundancies over the past few months. The unemployment rate in the UK peaked to its highest level in almost four years in the three months to September, with 314,000 redundancies reported1, and employers made further job cuts ahead of the anticipated end of the furlough period in October – this was then, of course, extended to April 2021 at the last moment, which came too late for many employees.

Losing your job can understandably be a veritable blow, especially for someone who might already be facing hardship. The sheer upheaval of recent months has made many people rethink their financial priorities, observes Melloney Underhill, Marketing Insights Manager at St. James’s Place Wealth Management.

“This increased awareness of our financial fragility, while unsettling, may well hold the silver lining for our future selves,” she says. “The uncertainty that has been ebbing and flowing over the last few months has resulted in many households reducing their spending, often by more than their income has reduced.”

Employees who have worked for at least two years are entitled to statutory redundancy pay from their employer, with the exact amount calculated according to age, weekly pay and number of years in the job. You also might receive an additional sum, depending on your contract.

Despite it being a challenging situation to be made redundant, there are many options as to how to make use of a lump-sum payout, and naturally, you want to be sure that you can make the most of this. Read on for some points worthy of consideration.

How much of it do I keep?

Redundancy payouts are free of tax and National Insurance for the first £30,000.2 If the payment exceeds this, you’ll need to be aware of how much tax you pay on the amount over £30,000 before you decide what to do next.

What are my priorities?
A good redundancy payment gives you the opportunity to sit back and take stock of your money, and figure out how you want it to work for you. It should also mean that there’s no need to make any hasty decisions, explains Tony Clark, Head of Retirement Marketing at St. James’s Place Wealth Management.

“Redundancy is a real trigger point for reassessing what you want to do,” Clark notes, and it’s sensible to focus on your short-term priorities before starting to make bigger plans.

“For a lot of people, making sure the bills are paid until you can secure your next source of income will be the immediate priority.”

How can I use it to help secure my future?
Once your short-term needs are accounted for, you can look at how to make your money work smarter for you in the long term. This usually involves maximising on the tax-efficiency of investments and pensions, with the tax relief paid on the latter subsequently increasing the amount of redundancy cash.

Above all, it’s essential to realise what your personal needs and goals are.

“It’s hard to simply say that everyone should put money into investments or pensions, as everyone’s needs will be different,” says Clark. “While for some people it’s a good idea to put it into a pension, for others it’s a chance to ensure there’s enough set aside for emergencies or perhaps for passing onto family.”

Should I seek advice?

A professional financial adviser is worth their weight in gold when you’re faced with a myriad of options in this kind of situation, particularly during these volatile times.

“It’s a life event where there can be a lot of decisions to make, and it’s potentially a scary and emotional time,” says Clark.

Advisers have certain strategies at their disposal, such as cashflow planning tools, to map out a plan for you. If you’re approaching retirement, for example, cashflow planning can help you work out the ramifications of the redundancy payment with regard to your pension income.

“You could use some of the redundancy money as part of your retirement income and cashflow, to be drawn upon later on, so that you can leave your pension untouched for a few years,” Clark says.

Ultimately, the so-called ‘best’ way to use your redundancy money will invariably depend on your personal circumstances, goals and what life stage you’re at.

“There’s a lot you can do with it, so it depends on your goals and where it can be best used,” says Clark. “It’s also a great opportunity to put that money to work, so don’t be afraid to take financial advice and understand how the money can be used to serve you.”

Have you been made redundant, or are planning for that eventuality? Do you want some guidance as to how to maximise, not sacrifice, your redundancy payout? Our dedicated team of advisers are here to assist you every step of the way, so get in touch today on 01444 244551.

Sources:

1 Labour market overview, UK: November 2020, Office for National Statistics
2 Redundancy: your rights, www.gov.uk, accessed 13 November

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.