Facing redundancy can be an intimidating time, therefore it is important for employees to be aware of their rights and have a clear overview of their 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 an employer makes a job role redundant forcing an employee to leave the company, they 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, their employer is usually legally required to pay them. The legal minimum is called ‘Statutory redundancy pay’ however it is vital for employees to check their contracts as they may be entitled to more . There are also plenty of online resources such as GOV.UK or Money Helper, which can help employees understand their rights.
2. Taxation on redundancy payment – It is important employees understand how much they 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. They should be aware that 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). Employees should also consider whether they could end up in a higher rate tax bracket, depending on their income and redundancy pay.
3. Review financial position and budget – Employees should work out what assets they have; pensions, savings, ISAs, property and investments, and what liabilities they have; mortgage, debt, childcare, insurance and utility bills. Then they should look at any other household income and expenses. If the amount of money they need each month is more than the amount they have coming in, they can then work out what action is needed to cover the costs. Money Helper has a great budget planner: Budget Planner | Free online budget planning tool | MoneyHelper
4. Debt repayment – If they can afford to, it might be worth using some of their 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 some 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 they afford to retire? – Employees who are nearing retirement age may want to consider the idea of retiring early. Depending on their circumstances, this may be more achievable than they 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 their company pension? – Employees should know that it’s fine to keep their pension with their previous employer and it will remain invested and safe until they 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. Employees should check these things before moving their pension.
8. Paying more into their pension – If they can afford to do so, employees may want to consider paying some of their redundancy payment into their pension to boost their retirement savings. There are limits on the tax relief they 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 employees are looking for somewhere to keep their redundancy pay beyond just their current account, they should make sure they do their research first. Before handing over any money, they should 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.”
