Getting a redundancy payment can help soften the blow of losing your job. But working out what to do with your redundancy package can be a bit of a minefield. Whatever you decide, don’t leave the lump sum in a bank account that doesn’t pay any interest.
- First things first – check all the money is yours
- Use your lump sum as regular income
- Keep up payments on essential extras
- Clear debts
- Paying into your pension
- Invest in other ways
- Start your own business
- Get some training
First things first – check all the money is yours
You can work out your statutory redundancy pay using GOV.UK’s calculator.
Even if the money’s in your account, don’t assume your employer has got their tax calculations right.
- You might owe extra tax on your payout (usually only if it exceeds £30,000), so before spending the cash on other things, contact HM Revenue & Customs to check you don’t owe any tax.
- The tax you owe depends on your income from all sources for the whole year, so it might not be possible to know at this stage if you will have to pay extra tax. It’s best to put some money aside just in case.
Use your lump sum as regular income
Use our Budget planner to work out how much you will need each week or month, and how long you can make the money last.
Even if the money is for everyday use, you won’t need it all at once. Leave it in an easy-access savings account, or a current account with a high interest rate.
Your redundancy pay can also double up as an emergency fund for unexpected costs. If you have to run it down, try to build it up once you return to work. There’s no rule about how big the pot should be, but most people aim for three to six months’ spending.
Keep up payments on essential extras
If your employment package included extras, such as private health insurance or a car allowance, you might want to budget for them, or consider doing without.
Interest charged on debts is nearly always higher than the interest paid on savings, so it almost always makes sense to pay them off – especially expensive store cards. There are exceptions: if you have interest-free (or very cheap) debt or if there are penalties for early repayment.
Paying into your pension
You get tax relief on the amount you pay into a pension scheme, for example if you’re a basic-rate taxpayer and you pay in £80, the taxman will top it up to £100. But pensions can be tricky, so if you’re unsure what’s the best for you it’s worthwhile getting advice from an independent financial adviser.
But pensions can be tricky, so if you’re unsure what’s the best for you it’s worth getting advice from an independent financial adviser.
Invest in other ways
Many people who don’t need their redundancy money straight away decide to save it or invest it.
Deciding where you want to save or invest will depend on how long you plan to save, how quickly you want to be able to get at your money, and how much risk you are prepared to take.
If, for example, you get a £20,000 lump sum, you might want to keep some of it for everyday use and invest the rest.
Start your own business
Redundancy could be the opportunity you’ve been waiting for, but setting up the business you’ve always dreamed of is not without its pitfalls.
Plan, prepare, and do as much research as you can before committing any cash.
Get some training
Paying for retraining to broaden your skills could make you more employable in the future, or give you the confidence to start something completely new. However, remember that training could make you unavailable for work and affect your entitlement to benefits.
This article is provided by the Money Advice Service.