Redundancy is something that many people have to face during their working life. In fact, one in seven workers was made redundant between the recession in 2008 and 2013, which equates to about 3.5 million people.
Losing your job can be stressful but you need to do your best to keep your cool and plot a path towards the next stage of your career. As soon as it becomes clear that you’re going to be made redundant then you should do your research to see what you are eligible to receive by way of pay (this piece is an ideal starting point for more information).
Once that is all sorted, however, you face a dilemma. What do you do with that redundancy pay? Here are some of the options to weigh up:
First things first, you need to consider how you will afford to live while you look for another job. The bills won’t stop just because your salary has. Don’t spend or lock away any cash until you’ve created a budget planner and are certain you can cover all of your financial commitments.
Redundancy can prove to be the catalyst for a change of career path. If you’ve left an industry in decline or a job that you no longer love, this might be the opportunity to change course. To do so you might need to take a qualification, buy some specialist equipment or even convert part of your home into an office or workshop. This would be the perfect use to ensure you invest in a brighter employment future.
Clear your debts
Having a lump sum of cash can allow you to clear any debts you might have. Paying off loans and credit cards can ensure that your money isn’t going towards interest payments and puts you in a better financial position.
The first £30,000 you receive in redundancy money is tax-free, anything beyond that will be liable to tax in the same way as standard pay would be. One way to avoid a big tax bill is to divert some of this money into your pension pot, something that might be sensible even if your payout is below £30,000. As a rule you can put £40,000 a year into your pension without needing to pay tax.
Your redundancy money can help you to top up a rainy day fund or boost your savings. It makes sense, at the very least, to put away as much as you can into an ISA account, which gives you tax-free savings. Beyond that, sluggish interest rates mean that you’ll need to shop around for the best deals.
If you’re put off by the lack of return from savings accounts then you could look to maximise part of your redundancy fund by putting it into investments. You should only do this if you are fully aware of the risk attached and understand what you are buying. Typically, investors should have a goal in mind for ten or more years into the future. If you are likely to need the money sooner, then you shouldn’t tie it up in this way. Check out the Which guide for beginners if you are new to investing.