Redundancy & Early Retirement22 July 2020
Having been made redundant twice in my working life, I know that being made redundant can be a turbulent and emotional time for most. Sadly, with the current pandemic position and the lockdown easing in the UK as a backdrop, the fear for many is that after the furlough position ends, redundancies and job losses may be widespread.
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 years start in April, and if we think that we are now into the summer, then we are three months into a tax year, as of early July. Therefore, if you add the potential payment above £30,000 to your earned income so far, you may well find that you will be taxed at 40% or 45%; 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 / workplace 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. Although this may be tax efficient, take account of your cash flow situation. Planning for your immediate future is usually vital.
With the potential of no income coming in for the short term, you will 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 State 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: https://www.gov.uk/check-state-pension
With the minimum age to access pension benefits being age 55, the aim of continuing to work to 65, or the slightly higher age of 66/67 to reach State Pension age, may still be the plan. However, the pandemic and its economic effects have been a real 'game-changer' for many, with the original life plans now back on the drawing board to be re-assessed. If redundancy has happened at an unexpected time (it usually is!), then this in itself may be the signal to look forward and recalibrate what you want to do. The thought of going back into what might be a crowded job market may not appeal, and we have already experienced some individuals who would prefer not to return to work, re-focusing instead on life goals, family and alternatives to the pre-COVID lifestyle of 2019 and before.
When looking at retirement income planning, there are usually many ways that financial objectives can be mapped and met, in whole or in part. Tax free cash can usually be released, and perhaps when combined with a redundancy payment, might repay mortgages or debt, or provide a source of tax efficient income.
The way pension funds can be used to provide future income can also vary, and these current options are detailed in our Retirement Options Schedule here: https://www.chaptersfinancial.com/private-clients/pension-retirement-planning. At the time of writing this blog (July 2020), it is important to remember that an individual is part way through a tax year from an employed income perspective, and this will have to be accounted for in drawing pension benefits to reduce the possibility of paying unnecessary levels of higher rate tax. As noted above, a payment in lieu of notice is taxable and may also have an effect on your overall financial and retirement income planning in the first tax year. Making a final payment to a pension before drawing benefits can sometimes also be an option.
However the next few months of 2020 and 2021 affect you and your plans, the team at Chapters Financial is on hand to guide clients and enquirers on the financial aspects of redundancy and the opportunity to take early retirement, if that proves to the preference selected.
No individual advice is provided during the course of this blog.
Keith Churchouse FPFS
Chartered Financial Planner
Chapters Financial Limited