Facing redundancy what employees should know
As a result of coronavirus, many businesses are struggling to make ends meet and find themselves in the unfortunate position of having to make some employees redundant.
For an employee losing their job, this means that they are likely to experience worries overpaying bills and being financially unstable. There may also be the additional stress of job-finding or strain on a relationship.
Here are some of the key areas that should be considered by an employee in this position.
How much tax will be paid on a redundancy payment?
It is important for employees to understand how much they will receive after tax has been deducted. Redundancy pay under £30,000 is not taxable. Redundancy pay above this amount is added to their income and charged at the marginal rate. An employee may find themselves in a higher rate tax bracket, depending on their income and the amount taxable redundancy payment being made.
They should look at household income and expenses to see if the amount of money they need each month is more than the amount they have coming in. They should also run through finances to see what bills can be cut and work out a budget to ensure spending is affordable.
Paying off debt
Having debt during this time may cause additional stress, so an employee may wish to consider using some of their redundancy payment to pay off some or all their debt. The cost of the most expensive debts such as credit cards is likely to exceed the interest earned on savings.
It would be worth keeping hold of some cash as a rainy-day fund, as it may take longer than planned to find a new job and some cash may be needed later.
Can they afford to retire?
If an employee is nearing retirement age, it may be possible for them to consider retiring early by relying on pensions and other assets. If a redundancy payment is used to reduce debts and associated costs, they may find that they need less income in retirement to be able to maintain their standard of living.
What happens to their workplace pension?
It is fine to keep their pension with their previous employer and it will remain invested until they come to access it later. Once they find new employment, they may choose to move their pension to their new workplace pension scheme, or to a private pension arrangement.
Paying more into pension
It may be worth considering paying some of their redundancy payment into their pension to boost their retirement savings. This may be particularly attractive for those approaching retiring as this would help to boost their pension pot. There are limits on the tax relief a person can receive from pensions, so it is important to check these limits or seek advice first.
What can employers do to help?
Consider providing financial education and support at work. This would help employees to understand what should be considered when facing redundancy. It would also provide employees with the tools to work out how they can take control of their finances going forward, positively impacting their financial wellbeing and reducing any stress at what is likely to be a very difficult time.
Lisa Vaughan chartered financial planner
Lisa Vaughan Financial Planning Ltd delivers a complimentary workplace education programme tailored to the needs of a business and its employees. The aim is to enable employees to understand their current financial circumstances, empowering them to make informed decisions regarding their finances now and in the future.
For further information about financial wellbeing support and workshops for your employees now or in the future, please contact Lisa Vaughan on 07570 068 039, firstname.lastname@example.org or www.lisavaughanfp.co.uk