Escaping the daily grind, particularly to pursue a special interest, can seem appealing, but prepare before putting your hand up, says Sam Barrett
Taking voluntary redundancy can be a fantastic opportunity to ditch the drudgery of your job and follow your dreams. However, while a redundancy package can be tempting, it’s important to weigh up your options and the financial implications before taking the leap.
Seeking volunteers is a way for employers to avoid going through a painful redundancy process, so volunteering incentives are often on offer. ‘Expect a package that is worth more than a compulsory redundancy,’ says Michelle Tudor, an employment lawyer and senior associate at Barlow Robbins. ‘Your employer might use a higher multiplier to work out your redundancy payment, remove the caps, or enhance it by a set amount.’
Other incentives can come into play, such as the removal of any notice period requirement, access to career retraining or an early retirement package.
However much you receive, the first £30,000 of a redundancy payment is tax-free, although your employer is required to deduct tax and national insurance contributions from any wages and holiday pay they owe you.
The package might appear extremely attractive, but you will usually be given plenty of time to decide whether it’s right for you, and you should use it. ‘Employers normally give staff at least six weeks to decide whether they want to volunteer for redundancy,’ says Vanda Cox, director of EQ Workplace. ‘Use this time to really understand your options. Your employer will have the final say on who goes, but make sure you know exactly how redundancy might affect you before you volunteer.’
Do the numbers add up?
Your finances should be one of your key considerations. Although you might be in line for a five-figure payoff, your regular pay and any employee benefits you receive will stop. ‘Think about your overall financial position,’ says Sarah Lord, a partner in financial planning at Mazars. ‘If you’re in the final push, it could be an opportunity to take early retirement, but if you’re early or mid-career, you’ll need to assess whether the redundancy package will cover your bills until you find a new income.’
Your pension will stop, so there is also a risk that your retirement savings will be derailed. As a result, where your settlement exceeds the £30,000 tax-free allowance, Lord suggests diverting some of the excess into your pension. ‘Providing you’re not close to the lifetime limit (£1.03 million) and you have sufficient annual allowance (£40,000) or can carry forward unused allowance from the previous three tax years, this can be very tax-efficient,’ she says.
As this diverted redundancy pay can be paid into your pension as an employer contribution, you won’t need to pay any tax on the money until you withdraw it. Then, as well as being able to take 25 per cent of it tax-free, you might benefit from being in a lower income tax bracket.
Your employer could enhance this pension contribution with savings it makes on national insurance. ‘If it paid this to you as part of your redundancy settlement, it would pay national insurance at 13.8 per cent,’ explains Cox. ‘Some employers are happy to put this into your pension.’
Taking voluntary redundancy may entail replicating some of your employee benefits, especially life insurance and protection policies covering your family. ‘The cost of replacing benefits such as private medical insurance and life insurance can be high, especially as you get older,’ warns Helen Richardson, an independent financial adviser at Ascot Lloyd.
Taking voluntary redundancy can affect other elements of your finances. Richardson says: ‘Protection policies covering unemployment do not pay out in the event of voluntary redundancy. It may be better to seek compulsory redundancy if policy terms would affect your financial health. Consider the figures carefully.’
Although your finances will be a major factor in your deliberations, there are plenty of other things to weigh up. If you’re looking to stay in employment, it’s prudent to explore your prospects. ‘Speak to a recruitment consultant,’ says Tudor. ‘They will be able to advise you on how quickly you could find another job and where you might benefit from additional training.’
The fork in the road
Future remuneration doesn’t necessarily have to come through employment. Voluntary redundancy can often be a springboard for setting up a business or taking early retirement. Cox says you could even consider a combination of these options. ‘Portfolio working is increasingly common nowadays, and if you’re over 55, you could take advantage of pension freedoms to supplement your income from your retirement savings,’ she says.
There is also a bit of a numbers game to play. As well as thinking about the strength of your company and whether compulsory redundancies with potentially smaller settlements are a possibility, it’s worth considering the likelihood of you being offered a voluntary redundancy.
Even if you put your name in the hat, there’s no guarantee your employer will select you. For some people, having signalled a desire to leave can make it difficult to remain with a company, so be prepared for such an outcome.
A set redundancy package may be on the table, but Cox says there is often room for negotiation. ‘Just about anything is up for grabs,’ she explains. ‘It will often depend on how flexible your employer is, but you might be able to secure training or negotiate part-time work to fit in with your retirement plans.’
Where a firm is cutting employees to save money, it may be worth asking for items such as your company laptop, mobile and car, as these may not be needed by other employees.
Try also to negotiate an extension on your employee benefits, especially if you’re in the middle of treatment under your medical insurance. ‘Employers will sometimes let you keep your benefits for six months,’ says Tudor. ‘It’s always worth asking.’
Training can also be up for negotiation. Many employers provide services to help with career advice, but some will also be willing to pay for training, even if it’s for a completely different job.
While there’s plenty of upheaval associated with taking a voluntary redundancy, understanding your options and their financial implications can make it a very rewarding choice.
Making a success of it
Think carefully about what you want to do. Voluntary redundancy can be an opportunity to change career, set up a business or take early retirement.
• Assess your employer’s financial strength. If its finances are under pressure, voluntary redundancy talk could be a forerunner to compulsory redundancies with smaller settlements.
• Speak to a recruitment consultant to understand your prospects in the job market and whether you need to retrain.
• Work out the financial implications, including how long your redundancy pay might last and whether there will be additional expenses such as life insurance.
• Negotiate, negotiate, negotiate. Everything from your mobile phone to the level of redundancy pay you receive is up for grabs, so don’t be afraid to ask for extras.
Redundancy: your entitlement
If you are made redundant, rules govern the minimum statutory redundancy pay that you can expect.
Providing you’re an employee and have been working for your current employer for at least two years, you will be entitled to the following:
• Half a week’s pay for each full year you were under 22 years old
• One week’s pay for each full year you were aged 22-41
• One and a half week’s pay for each full year you were 41 plus
There are several caps in place. Weekly pay is capped at £508 for anyone made redundant after 5 April 2018; length of service is capped at 20 years, and the maximum statutory redundancy pay you can receive at £15,240.
It’s important to note that some employers will offer more generous redundancy pay, especially where they are seeking voluntary redundancies.
And stretch...photography and pilates
For Ruth Tilly, 59, voluntary redundancy provided an opportunity to focus on some of her passions. ‘I’d set up a photography agency while I was working, so when voluntary redundancy was offered, I could concentrate on building up this business,’ she says.
Although she had this safety net, Tilly was careful to ensure her finances added up before she took the leap.
‘I’m a bit of a spreadsheet obsessive, so I worked out exactly how much I needed to cover my bills and make the career change viable,’ she says.
A key part of this was analysing how leaving her job would affect her retirement savings. ‘I took the tax-free £30,000 to supplement my income from the business, but the rest went into my pension. As long as I don’t touch it until I’m 66, I’ll have the same-sized pot as if I’d stayed with the company.’
Further breathing space came with an overhaul of her personal finances. ‘I’d always overpaid my mortgage, but I decided to extend it back to its original term to reduce my monthly repayments,’ she says. ‘I will overpay again when I can, but reducing my expenses will help me concentrate on my business.’
Tilly also has a plan B in place, thanks to the retraining offered as part of her redundancy package. ‘I’ve done pilates for around seven years, so I decided to use this opportunity to take a course to become an instructor,’ she says. ‘It’s not something I would ever have considered if it hadn’t been part of the package, but it will potentially give me an additional source of income.’