Redundancy. The Financial Planning Considerations

27th November 2008

Martin Bamford, a Chartered Financial Planner at Informed Choice, outlines the financial issues facing those hit hardest by the economic downturn.

Redundancy can occur for a number of reasons, but the current economic downturn is likely to increase the number of redundancies taking place across the UK. With every redundancy comes a whole series of important decisions to make about financial planning, in addition to the human and emotional impact.

Every redundancy is different because every person who experiences redundancy will have very different circumstances, goals and objectives. However, there are often some common areas of concern that need to be addressed.

Your immediate financial planning concern is likely to be how your redundancy package, and subsequent financial position, will relate to your financial needs post-redundancy. It is important to seek professional legal and financial advice at this early stage, as decisions made now can have a lasting impact on your long-term financial prosperity. Legal advice can ensure that you maximise the benefit of your redundancy package. Financial advice ensures you organise your finances in the most effective way.

The most powerful financial planning for redundancy takes place long before the subject is even raised by your employer. In times of economic uncertainty, when companies might well start to downsize or restructure, it is even more important to be proactive with your financial planning.

Proactive steps

The two most valuable things you can do in anticipation of redundancy are to cut down on your committed expenditure and create an emergency savings fund.

Expensive unsecured debts, including credit cards and personal loans, are more than just a drag on your ability to meet your financial objectives. Combined with a temporary or sustained loss of income, unsecured debts might well be a contributing factor leading to bankruptcy. A robust emergency cash savings fund will give you sufficient breathing space to assess all of your options and, if necessary, find new employment.

Most financial planners recommend an emergency fund equivalent to three to six months' typical expenditure. This money needs to remain accessible in the event of a real financial emergency but not too easy to access, in case you are tempted to dip into the fund during a non-emergency situation.

Another proactive step you can take is to put in place unemployment cover, but this needs to be done before impending redundancy or you will not be able to make a successful claim. The terms of unemployment cover (which can be included within an accident, sickness and unemployment plan) will vary depending on the insurer. These plans typically cover between 50% and 65% of your income up to a maximum benefit of £2,000 a month. Benefits received after a successful claim will only normally last for 12 months. These policies only cover involuntary redundancy.

Early retirement

Depending on your age at the time redundancy occurs, retirement is likely to be a serious consideration. As this is likely to be early retirement (or at least earlier than originally planned) you will need to look carefully at affordability. After all, you are younger so your pension benefits will have had less time to accumulate and will need to last for longer.

Early retirement prompted by redundancy is a good opportunity to re-evaluate your lifestyle and the associated living costs. Your pension might produce lower benefits than originally predicted, but this is all relative. Lower pension benefits are manageable when combined with a lower cost of living.

Retirement ahead of your selected retirement age can result in the need to retain a degree of flexibility. An unsecured pension allows you to take the maximum tax-free cash from your pension benefits and this might be used to repay the mortgage or other debts.

You can then draw a level of income directly from your pension fund, which remains invested. Importantly, this income can be varied each year depending on your requirements. If you find new employment then the income can be reduced to zero so as not to aggravate your income tax position.

The unsecured pension option is not suitable for everyone, but it can provide an attractive alternative to securing an annuity income at a time when the fund value might have fallen from its peak and you are too young to benefit from a particularly competitive rate.

Missing benefits

Redundancy often results in the loss of valuable employee benefits previously provided by your employer as part of your remuneration package. These employee benefits might include death in service and private medical insurance. Redundancy should serve as a prompt to understand these existing employee benefits and decide whether or not you need to replace them with relevant cover on a private basis.

Death in service benefit can be readily replaced with term assurance. This can be tailored to your specific circumstances, with the sum assured and term chosen to fit with your cover requirements and likely retirement age. Remember to consider the use of a suitable trust.

Some private medical insurers will allow you to take over existing employer-sponsored cover at preferential rates. This is often much cheaper than starting from scratch with an individual policy. It is also a way to ensure continuation of cover if you have any pre-existing medical conditions.

Modern financial products such as these are designed to be reasonably flexible. This means that you can put arrangements in place and then cancel or adjust them in the future, if your circumstances change again.

Because it can take a number of weeks to underwrite some forms of financial protection, particularly if you require substantial amounts of cover or have a complicated medical history, it is worth starting this process early when the topic of redundancy is first raised by your employer. This will put you in the position where you can put the new cover on risk as soon as existing benefits come to an end, therefore preventing any time gaps in your cover.

Help from the state

Depending on your financial circumstances, you might qualify for help from the state when you are out of work. Your first port of call should be Job Centre Plus, which will be able to tell you about your entitlement to payments or benefits.

If your redundancy payment exceeds £8,000 you will not be entitled to receive the income-based component of jobseeker's allowance. However, you could still qualify for the contribution-based jobseeker's allowance, assuming you have paid or been credited with class 1 national insurance contributions in the relevant tax years. This can provide up to £60.50 per week if you are aged 25 or over.

Citizens Advice is another good source of advice on all aspects of benefits and housing.

Time for advice

As a result of the complex interplay between the different areas of your personal financial planning, it is worth seeking professional financial advice to ensure you have considered all of your options and made the most suitable decision based on your personal circumstances.

This is one area of financial planning where it pays to use a fee-charging adviser. He or she will be able to look for solutions, including the repayment of debt and restructuring of existing financial arrangements, that could be overlooked by a traditional financial adviser who needs to sell a financial product to generate a commission.

You will need to work closely with your financial adviser and keep him or her informed of the situation as things develop and change.

Again, it makes sense to seek advice at an early stage in the process. We often deal with clients facing redundancy and in a panic to make urgent decisions ahead of deadlines that have been imposed. It can take time to request detailed information and conduct analysis ahead of providing advice to a client who is being made redundant.

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redundancy. the financial planning considerations