As job losses mount: How to protect against redundancy and manage the financial fallout if it hits

Global financial and technology giants have been shedding a huge number of jobs in recent months. About 15,000 banking jobs have been cut this winter, while Spotify, Alphabet and Microsoft have recently announced more than 30,000 staff losses.

While the latest signals for the UK economy have encouraged more optimism than some of the dire outlooks released late in 2022, it seems inevitable that British businesses are in for a tough 2023. The number of firms on the brink of going bust jumped by more than a third at the end of last year[1], so redundancy is a threat at many companies in certain sectors.

Zoe Bailey, Chartered Financial Planner and Director at leading wealth manager Evelyn Partners, says: “Redundancy might be something employees have seen approaching on the horizon, but it can also strike out of the blue. Either way, there are some steps people can take to ensure they are protected against this possibility – as well as tactics to cope with the financial fallout should it arrive.”

Defending against redundancy or loss of earnings

“An obvious and sensible safety net is a buffer of cash savings,” says Zoe Bailey. “The amount that is deemed optimal will depend on the length of time you might expect to remain unemployed, the outgoings you need to meet, and any other protections you might have in place – but it could also be limited by how much you can afford to save. I recommend my clients aim to save six to twelve months of basic expenditure as a minimum in their cash reserve for peace of mind.

“Paying the mortgage is often the primary concern for those who face losing their earned income, and this could override other imperatives in determining what the employee does with their redundancy payment,” says Bailey. “Which means that if someone makes provision for this key fixed outgoing, alongside other monthly bills, then they should have more flexibility, financially and with career choices, if they do face redundancy.”

She adds: “This makes some income protection policies very valuable. Some employers include income protection as a standard or optional employee benefit, but while this should cover illness and disability, it will very rarely protect against unemployment. To protect yourself again the possibility of redundancy you should research personal standalone income or mortgage protection policies that are available from insurance providers and brokers. A financial planner can ensure you’re putting in place the correct protection policies for you, and your financial dependents if applicable.”

Being made redundant 

“For anyone given this news, it can be a huge shock,” says Zoe Bailey, “but there are a number of points you need to address sooner rather than later.”

• You should receive payment in lieu of notice, so it’s important to know what your notice period is. If you don’t and can’t locate your contract, 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, assess your redundancy package and make some plans.
• 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.
• It’s always worth considering if you can negotiate a better redundancy package. This is where it is beneficial to speak to an employment solicitor or possibly a union representative to discuss your options.
• It’s important to identify the employee benefits that will be lost through redundancy, like death in service life cover or private medical insurance, as it could be a priority to replace them with self-funded policies.

Be aware of your tax situation

Payments in lieu of notice and holiday entitlement will be taxed as regular income. Depending on where you are in the tax year, and how much you earn for the remainder of it, you might be overcharged by PAYE. But it is up to you to check this and notify HMRC, and it might involve claiming back overpaid tax with a self-assessment tax return.

There is a tax-free threshold for redundancy payments, set at £30,000, with the tax on any amount over this threshold set at your marginal rate of income tax.

“This like many other thresholds has been frozen for many years, making redundancy a more taxable event with every year that goes by,” says Zoe Bailey. “With income tax thresholds also in a deep freeze, it makes sense not to give too much away to HMRC, particularly on a redundancy payment that could be an important long-term boost to finances.”

Mitigating against excess tax

If your redundancy pay-off exceeds the tax-free amount, the most straightforward option for maximising the amount you keep is to have the excess paid into your company pension, in order to benefit from income tax and possibly National Insurance relief. The mechanics of this and how you receive or claim your relief will depend on how the pension scheme is operated. While a salary sacrifice system will grant both your full income tax and employee NI relief automatically - with some employers passing on all or part of their NI relief as well - other schemes will require the saver to claim some of their income tax relief on their Tax Return if they are a higher or additional rate taxpayer.

The maximum that most people can pay into a pension each tax year with tax relief is £40,000 gross (or your annual salary if it is lower) – and this obviously includes monthly contributions and any lump-sums that have already been made into your pension in that tax year. This allowance can be tapered down for higher earners, and if you are in this position it is beneficial to seek professional help.

“That could also be the case if you want to squeeze more into your pension by utilising carry forward allowances going back up to three tax years,” says Zoe Bailey. “In combination with salary sacrifice, large redundancy packages can turbo-charge retirement savings by massively reducing income tax and NI liability through carry-forward. This is a potentially complicated process which can be misinterpreted and is usually best supported by working with a financial planner.”

“High earners might also want to consider the implications of new tax thresholds that come into effect from the new tax year in April,” adds Bailey. “Those earning between £125,140 and £150,000 will be paying more tax on their income than this tax year, at the additional rate of 45%, and can mitigate some of this via pension contributions which will also benefit from more tax relief.”

Finally, if you are expecting to be in employment again in the same tax year, and have already used up your annual pension allowance in this way, be aware that further pension contributions – whether from auto-enrolment or otherwise – would have any tax relief that was granted clawed back. However, again you may be able to utilise carry forward allowances in this situation.

The downside to feeding taxable redundancy payments into a pension is that the funds are locked away until private pension access age (55, rising to 57 in 2028) - which is obviously less of an issue for those who are close to that age. For some clients, taking this action with voluntary redundancy packages has enabled them to retire sooner.

Managing your company pension

“Even if you aren’t concerned with feeding a redundancy payment into it, you will probably still have a company pension to think about,” says Zoe Bailey. “This can be an area often forgotten about during the stresses of the redundancy process.”

For those who don’t want to or can’t access their pension funds yet, it is simply a question of how to administer the policy: leave it where it is, roll it into a new company pension or transfer it into a self-invested personal pension or similar. This decision will depend in part on the generosity of the scheme, for instance if there are any perks or benefits that will be lost by transferring out.

In the case of final salary or defined benefit (DB) schemes, if you are offered a transfer value of more than £30,000, the law requires you to take advice on giving up your pension rights. This is because transfer values or cash-in lump sums offered by employers or scheme administrators might not adequately compensate savers for the future pension income they could forego.

For a defined contribution pension pot, if fees are high, flexibility of income options are low or investment choices poor then there is less incentive to leave it where it is - especially if keeping it adds to a number of old pensions pots that become a headache to keep track of. At the very least check that your investment fund choices fit with your personal risk profile and retirement goals. Some savers purposefully retain one or more small pots of less than £10,000, because they do not use up the lifetime allowance and can be cashed in without flexibly accessing your pension, and therefore don’t trigger the money purchase annual allowance.[2]

For those who are 55 years of age there is the option of taking some or all of their 25% tax-free pension lump sum to help with their transition through redundancy. This could be arranged after the pot has been boosted by a salary sacrifice contribution from a redundancy package, providing an almost immediate tax relief ‘gift’ from the government.

This might seem especially attractive to those who were considering retirement anyway – but it should be kept in mind that it will deplete a pension pot, leaving less for later years of retirement. It could also crystallise investment losses if done during a market downturn. The 25% tax-free element can alternatively be taken in tranches over years, rather than as a lump sum.

Managing your outgoings and planning for the future

It is essential to make a financial plan for redundancy, in order to calculate how long one can comfortably remain without earned income – or for older workers, whether it is feasible to bring forward retirement.

Zoe Bailey says: “With the current levels of pressure on household finances, and many defined contribution pension holders having suffered some investment losses last year, the dream of an early and long retirement is more difficult to realise than it has been in the recent past. So much so that we are seeing many recent retirees return to the workforce, as they discover they can’t maintain their required standard of living with their pension provision alone.

“Prospective retirees therefore need to be realistic and get a complete picture of their financial situation and monthly outgoings in order to formulate a holistic retirement plan - or a phased-retirement plan that includes a continuing source of earned income. And for this, it is hard to replicate a sophisticated cashflow model – and the support and recommendations that come with it from a good financial planner.”

NOTES

[1] Begbies Traynor, 24 January 2023

[2] You usually pay a tax charge when you come to access your pension if your combined pots are worth more than the lifetime allowance, which is currently £1,073,100. If you start to take money flexibly from a defined contribution pension pot, the amount that can be subsequently contributed to a pension annually while still getting tax relief might reduce from the typical £40,000 to just £4,000.