Every month, we put one of your questions to our experts. In this article, Ross Anders, a Financial Planning Partner in our London office, and Ann-Marie Atkins, the Managing Partner for Financial Planning in the North West, give their opinions.
I’ve been made redundant because of Covid-19 by the company that I’ve worked at for the last 20 years. They will provide me with a lump sum in redundancy pay. I am aware that the redundancy tax-free threshold is £30,000 but I’m not sure how to best provide for my family with the package I’ve received and my other savings. What should I do now?
Ross Anders, Financial Planner
I am sorry to hear that you are going through this. I appreciate it is a big shock but there are a number of points you need to address sooner rather than later.
The redundancy itself and your entitlement
Given your length of service, it’s obvious that you are loyal to the company but now is the time to think of your own and your family’s needs.
You should receive payment in lieu of notice, so it’s important to dig your original employment contract out and look at what your notice period is. If you don’t have the contract to hand, speak to your HR department. At this stage, if it hasn’t been offered already, you may be able to ask for gardening leave. Having this time off is a great opportunity to take a well-earned break and focus on assessing your redundancy package.
Next, make sure you know exactly what your redundancy pay entitlement is. There are rules around the amount of statutory redundancy pay and these are set out clearly on the government’s website but many companies go above this figure, as yours has.
It’s always worth considering if you are in a position to negotiate a better redundancy package. This is where it is beneficial to speak to an employment solicitor to discuss your options.
Consider your position after redundancy
Following redundancy, you need to think about where you are in life and for how long you need to keep working:
- You might be thinking of retiring within the next couple of years or so and the redundancy might just bring forward your retirement date
- If you’re considering retiring within the next five to ten years, what I often see is people going into consultancy or becoming self-employed to top up their earnings and fund a comfortable retirement in the not too distant future
- If you’re 10-20 years away from retirement, you might want to take a small career break, but you will more than likely be looking for a new role.
The value of financial advice
Once you have made these decisions, think about what you want to do next and if you can afford to do it. That’s where the value of financial advice comes in.
A financial planner can help you to get a feasible and realistic plan in place. While you can guess or estimate things like if you can afford to retire now, you cannot see for certain. What a financial planner can do is take everything financially and personally in your life and help you move forward with what you want to do.
Generally, creating this plan will involve cashflow modelling. It shows you how much money you could have in the future and whether you are on track to achieve your goals. It can help you to decide when to retire or see if there are any potential shortfalls in your finances.
A financial planner will take all of your assets, including pensions, investments and your redundancy package, into consideration alongside any outgoings, such as a mortgage or school fees. For example, when the income from any existing investments is taken into consideration alongside the redundancy pay you received, it may become clear that you are able to retire earlier than you previously expected. On the other hand, it might be that although you have received a reasonable size redundancy settlement, you have a mortgage and are putting children through private school so you need to continue to work. You may even need to use the cash from the settlement to plug any holes in your income until you get a new job.
An area often forgotten about during the redundancy process is your company pension. In this case, it’s a good idea to have a financial planner look at it. A financial planner can give you advice on changes to consider, such as changes to the funds or even transferring it. Alternatively, it might be appropriate to draw on your pension now if you are 55 or over. Following the 2015 pension freedoms, you have total control over how you access your pension. By drawing on your pension now, this may cover the loss of income from your employment.
It’s also important to identify other shortfalls which may have resulted from your redundancy. These are likely to include loss of benefits which would have ended when you left the company. The most common examples are death in service, private medical insurance and income protection. A financial planner will be able to see what exactly has been lost and what types of cover are necessary for you and your family.
Ann-Marie Atkins, Managing Partner
This must have come as quite a shock to you but nothing could prepare any of us for the impact of the Covid-19 pandemic.
Help is available if you need it
You may want to check for and claim any State benefits you might be entitled to. Remember that these are available to those who need them at times like this. You can find further information by contacting Jobcentre Plus (or the Jobs and Benefits Office in Northern Ireland)*.
Check your tax position
As you mentioned, the tax-free threshold on a redundancy payment is set at £30,000. The tax on any amount over this threshold is set at your marginal rate of tax. There are ways that you can mitigate this tax on a redundancy payment. One of the most common ways to do this is to make an additional pension contribution. The maximum that most people can pay into a pension and get tax on relief is £40,000 (as of the 2020/21 tax year) not accounting for any unused carry forward allowances. You personally cannot pay in more than your annual salary. This salary is generally based on that from your employment. Please note allowances are tapered down for higher earners. You must seek advice if you are in a position to consider this.
Get a complete picture of your finances
You should work out what your current financial situation is and how it is changing due to the loss of employment income and addition of the redundancy payment you have received. The payment might look like a lot of money on paper but if you check this against your outgoings, you may find that after a few months you will be left with less money than you initially thought.
You can often make some changes to your outgoings quite quickly and easily. Check your bank statements carefully to look out for any regular payments and subscriptions. Many people don’t even realise they have them so cancel them where you can. Shop around for better deals on your essential expenditure on things like energy bills and car insurance. There are plenty of cost comparison websites so it’s worth taking a look.
Following your redundancy, you may also need to think about how you are going to pay your mortgage. There may be some Government-backed mortgage holidays available to you but if you are in any doubt about how you are going to pay your mortgage, you should contact your mortgage provider immediately for more help and support.
Another large outgoing that you may have is school fees. If you are concerned about paying the fees, think about contacting the school directly to discuss your options. This may include deferring fee payments or a charitable grant but each school has their own set of rules surrounding fee payments.
By closely looking at your incomings and outgoings, you can understand the impact of the changes on your life.
What do you need to do next?
It’s important to remember the distinction between what you want to do and what you need to do. While you might want to take early retirement and use your redundancy pay to travel the world, you may in fact still have a mortgage to pay and children to support. The reality here is you may need to carry on working to cover your outgoings and fund a comfortable retirement for 10 years’ time, or you may need to use your redundancy pay to cover your outgoings if you can’t get a new job immediately.
Using cashflow modelling
Ross mentioned the use of cashflow. In your circumstances, it might show:
- You need to use the money from your redundancy pay to cover your expenditure
- You don’t need to use this money at all and you could invest or spend it
- It’s tax-efficient for you to pay some of this redundancy payment into your pension
- Your existing assets cover your loss of income and you may no longer need to work
- You may still need to work but you can reduce your hours as your redundancy payment and other assets might be able to subsidise your income.
Think about investing
If the cashflow model shows that you do not need to use your redundancy payment to fund your lifestyle, you might want to think about investing it. Often following a redundancy, the last thing people are thinking about is investing but given the current economic circumstances, now could be a really good time to enter the market. It can, however, be quite difficult to judge the timing of this and make informed decisions about an investment, so I would always recommend seeking professional advice first.
Speak to Tilney
Tilney is helping lots of people with their financial plans following redundancy. If you think you’d benefit from a conversation with a financial planner, we’re here to help. We can offer you a free initial consultation which is easy to book online or by calling us on 020 7189 2400. We can’t give you advice during this consultation but we can explain the options and also how Tilney may be able to help.
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The value of an investment may go down as well as up, and you may get back less than you originally invested. Please note we do not provide tax advice.
*Source: The Money Advice Service April 2020
This article was previously published on Tilney prior to the launch of Evelyn Partners.