How would redundancy affect your financial well-being?

The global pandemic has brought difficult times for many people and some firms have taken tough decisions to make employees redundant. It is important to educate yourself about the impact of redundancy on your financial well-being and what to do if you lose your job. While this is a scary thought, it is always better to hope for the best but plan for the worst.

If you are made redundant, you may be entitled to a redundancy payment provided that you have been employed for at least two years. The minimum under Jersey law is one week’s pay for every completed year of continuous employment with your employer. It is capped at £780, although benevolent employers may offer more than this.

Retirement fund implications

Because redundancy means leaving your employer, you may also have to decide what to do with your retirement savings in the employer’s pension scheme. Scheme rules vary between employers, but you can check which of the following would apply, with your HR department, or your pension scheme administrators. Ideally you would not want a short-term change in employment to affect your long-term retirement plans. You can help preserve your retirement savings by:

1. leaving your retirement savings invested in your ex-employer’s pension scheme
2. moving all your retirement savings to:

• your new employer’s pension scheme
• your own individual retirement trust scheme or alternatives depending on your age and circumstances such as an annuity or approved drawdown contract
• if there is less than £19,000 in the pension, you may be able to withdraw it, subject to income tax
• if you are over the age of 60 you may be able to withdraw up to £35,000, subject to income tax

If you take all or a part of your retirement savings in cash, then you may not be able to achieve the income you need when you retire. Any cash taken out will also be taxed, although if you are over 50 and in a Jersey scheme with no UK transfers you can withdraw up to 30% tax free. If you have received a UK transfer, it is 25% but from age 55. The rules can be complex, so seek financial advice if you wish to withdraw cash from your pension.

A common misconception of leaving your money with your current employer’s scheme is that the money is simply kept without earning investment returns and won’t grow – this is not usually the case. Your money should remain invested but please check that it is not just left in a cash fund. A lump sum transferred to a retirement trust scheme or left in a former employer’s fund will grow with investment returns. If you leave it with your former employer, you can no longer contribute to the scheme. 

In many cases, any person who has the option to take their retirement savings in cash when they leave their employer will instinctively do so. It may even be considered the “easy” option but even though saving your money now does not serve you immediately, it will definitely benefit you later to meet future needs if you preserve it within a pension scheme. Ideally emergency savings should be in place to avoid dipping into retirement funds at these exit points.

Tips

1. Seek help through counselling 

Redundancy is a financially and emotionally stressful experience. Consider counselling before making any major financial decisions. Friends and family will give advice if you ask. You may need to accept that budgeting and cutting costs are unavoidable. However, it’s important to put thought and consideration into these decisions. 

2. Keep paying insurance premiums if you can afford it

These are essential and can prevent further financial distress should something else unexpected happen. Ensure you and your family have life assurance and if possible private medical insurance and critical illness cover. Reconsider any luxury goods and services and cut back on wasteful expenses. 

3. Save for emergencies while you can

Consider contributing towards an emergency savings pot, in case the worst happens. Aim to save at least three times your monthly salary as a financial buffer. This will help take some of the pressure off if you are ever made redundant.

4. Get financial advice about your options

Because personal circumstances differ between individuals, seeking financial advice from an experienced adviser could prove beneficial in limiting expenses and managing your money so that it can stretch further and meet your specific needs. Consider your pension scheme’s retirement benefit options, which may assist you in the financial decisions related to your retirement savings. Your adviser will help you understand the pros and cons of these options.

5. Keep learning and growing

With global economic activity evolving, the fourth industrial revolution looming and redundancies on the rise, it is crucial that we have a competitive edge as individuals. In an era where technology is advancing incrementally, individuals must constantly educate and upskill themselves to remain relevant in the market.