If you’ve been made redundant from a job that you’ve worked at for at least two years, there should at least be the silver lining of a redundancy payment.
But knowing what to use this money for and how long it will last isn’t always easy, as it will depend on your individual circumstances and how much you’ve received.
In this article, we explain how your redundancy money is calculated, and look at ways you might be able to make it go further while you look for work.
What is redundancy pay?
If you’re made redundant from an employer who you have worked for continuously for at least two years, you are legally entitled to a sum of money from that employer. This is your redundancy pay.
You are also entitled to a redundancy payment if you are working on a fixed-term contract of two years or more, and this is expiring rather than being renewed.
You shouldn’t have to ask your employer for your redundancy pay, you should receive it automatically.
How is my redundancy pay calculated?
Statutory redundancy pay is the amount that you are legally entitled to, and is calculated based on your age, weekly pay, and length of employment. If you’re made redundant at age 41 or above, it is calculated as 1.5 weeks’ pay for each full year of service. Weekly pay is calculated as the average pay over your last 12 weeks of employment before redundancy, meaning your employer cannot calculate it using a lower pay that you might have received in the past. Weekly pay is capped at a current limit of £571 for these purposes in 2022/23 (or £594 in Northern Ireland), and only up to 20 years of employment (no more) can be taken into account. These limits mean statutory pay is capped at £17,130 (or £17,820).
So, for example, if you were made redundant at the age of 58 after working at a company for eight years with a weekly pay of £300, you would receive 1.5 weeks’ pay for each of those eight years. That means you would receive £450 (1.5 x £300) multiplied by eight, which works out at £3,600.
Your employer must show you in writing how your redundancy pay has been worked out. You can also use this service on the GOV.uk website to calculate it yourself if you don’t think they’ve got it right.
Alternatively, you may have a specific amount of redundancy pay named in your contract that is more than the statutory pay you’re entitled to. Check your contract to see whether this is the case, and bear in mind that your employer cannot use a contract to pay you below the statutory amount. In other words, contractual redundancy pay should always be either equivalent to or more than statutory pay – statutory pay is the absolute minimum.
What should I use my redundancy pay for?
Use it as income or savings
If you don’t have another job lined up and aren’t near retirement age, then you’ll usually need to use your redundancy pay to support yourself for the time being. Depositing the money in an easy access savings account or your current account and using it for regular things like bills, groceries, and rental or mortgage payments could tide you over until you’re able to find a new job.
Alternatively, if you already have savings or an alternative income source, then you could keep your redundancy pay as an emergency fund for unexpected costs.
Clear your debts
If you have outstanding debts that can be covered with your redundancy pay then this could be a good opportunity to settle them, as long as you’ve set aside enough to cover your other outgoings for the next few months.
After all, the longer they remain in place the more the interest or even penalties on them could be. Bear in mind that some forms of debt come with early repayment penalties, so make sure you double-check before paying them off.
Pay into your pension
If you think some of your redundancy money would be best used in retirement and you don’t need it to cover your immediate living costs, you might want to consider investing it into your pension fund. One huge benefit of doing this is the tax relief you receive on your pension contributions – for example, if you’re a basic rate taxpayer and want to add £100 to your pension, you’d only need to pay in £80, as the government would add the remaining £20 in tax relief. Read more about this in our article How pension tax relief works.
Invest it or start your own business
If you’ve always wanted to work for yourself rather than an employer you might want to think about using some of your redundancy pay to start your own business. You probably only want to consider doing this if you have additional financial security in place, such as savings or a partner who can support you, as it can take time to make a profit, and there’s the risk of losing money if things don’t go according to plan. Check out our guides on self-employment or our savings and investment section for more ideas and advice.
Finally...
It may be in your best interest to speak to a financial adviser before considering any of these options. You can read our article Should I get a financial advisor? to find out more.
If you’ve recently been made redundant and are struggling to find new work, then Rest Less has an extensive set of resources for people in your position. Our Jobs section includes a search tool for jobs from age-diverse employers across the UK and career advice articles.
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