Redundancy, a life junction?

Having been made redundant twice myself in the past, I know that this situation can be emotional, stressful and daunting. Sadly, with the current austerity cuts proposals of the coalition Government in their comprehensive spending review, we may see an increase in this situation occurring.

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 the 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 year starts in April, and if we think that it is now October, then we are seven months into a tax year. Therefore, if you add the payment above £30,000 to your earned income so far, you may well find that you will be taxed at 40%, however check this with an accountant or tax adviser because all of our circumstances will be different.

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’s scheme, such as an AVC, money purchase or Executive 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. For this financial planning, you should seek Independent Financial Advice (IFA).Although this may be tax efficient, take account of your cash flow situation. Planning for your immediate future is vital.

With the potential of no income coming in for the short term, you are 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 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. You may want to use tax free cash and income to replace the income lost from employment. If you are looking at this, then it may well be worth your while checking your state pension benefits, and that of your partner/spouse if you have one, to ensure that you know what these can offer. You can do this by using a BR19 State Pension Forecast form and this can be found here.

Redundancy can be seen as a life junction and possibly an opportunity to reinvent your future employment situation. You may choose to start your own business and, as an aside, Surrey Chambers of Commerce can help you with this. I have detailed my own personal experiences in my book, Sign Here, Here and Here!...Journey of a Financial Adviser.

We are all different and therefore, this article should not be seen or used as individual advice. Seek Independent Financial Advice for your circumstances.
Further details of the book and our service are available at our websites, www.signherehereandhere.co.uk or www.churchouse.com

Keith Churchouse
Director of Churchouse Financial Planning Limited
Churchouse Financial Planning Limited is authorised and regulated by the Financial Services Authority. The Financial Services Authority does not regulate taxation advice.