Been made redundant? Make your redundancy pay work for you
Whether it’s covering short-term needs, creating a safety net or investing for the future, this lump sum can help to make the best of a challenging situation
A glimmer of hope was added to the headlines around coronavirus in early November, as the prospect of an effective vaccine for COVID-19 appeared to move closer to reality.
Any suggestion of light at the end of the tunnel offers cause to be optimistic after the uncertainty of recent months. But we’re still feeling the physical, mental and financial effects of the pandemic, and it’s clear that this is likely to continue for some time to come.
One stark indicator comes in the form of a swathe of redundancies over recent months.
The UK unemployment rate jumped to its highest level in almost four years in the three months to September, with 314,000 redundancies reported during the period1. Employers continued to cut jobs in anticipation of the furlough period closing at the end of October, with the eventual extension of the scheme until March 2021 coming too late for many workers.
The loss of an income can be devastating, particularly for those who may already be struggling to keep on top of their finances. But the spotlight on household finances has rightly encouraged many to take a closer look at their financial resilience, explains 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.”
Those made redundant may also find themselves with a lump sum. Employees who have worked with an employer for at least two years are entitled to statutory redundancy pay, with the exact amount based on age, weekly pay and number of years in the job. You also might receive an additional sum depending on your contract.
There are plenty of options available when it comes to using this payout. But how can you make sure you get maximum value from it? Here are some questions to consider.
How much of it do I keep?
Redundancy payments are free of tax and National Insurance for the first £30,0002. If you receive more than that, you’ll want to be clear as to how much tax you pay on the amount over £30,000 before you think about your next steps.
What are my priorities?
A decent redundancy payout offers breathing space to take stock and work out what you want to do with the money. It should also mean there’s no need to make any hasty decisions, says 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 the short-term needs are covered, you can turn to making the money work harder for you over the longer term. This invariably means taking advantage of the tax-efficiency of investments and pensions, with the tax relief paid on the latter effectively boosting the amount of redundancy cash.
The key, however, is to work out what your own 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?
Given the potentially wide range of options available, the guidance of a professional adviser can prove invaluable, particularly during a difficult time.
“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 can use specific strategies, such as cashflow planning tools, to map out a plan for you. If you’re close to retirement, for example, cashflow planning can help you work out the implications of the redundancy payout on 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.
The best way to use your redundancy money will depend on your own circumstances, goals and where you are in your life journey.
“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 advice and understand how the money can be used to serve you.”
Have you been made redundant and want to use your redundancy pay in the most efficient way? We’re always on hand to help with decisions about your financial future. Just ask.
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.
1Labour market overview, UK: November 2020, Office for National Statistics
2Redundancy: your rights, www.gov.uk, accessed 13 November