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We’ll explain the payments you may be eligible for, and how you can use them to build or restore the future you want.
How much redundancy pay are you entitled to?
If you’re an employee of a company (rather than a freelancer or contractor), and you’ve been there for over two years, you’re usually entitled to statutory redundancy pay. This is calculated based on your age, and how long you’ve been employed by the company.
• Up to age 22, you’re entitled to half a week’s pay for each full year of employment.
• Between ages 22 and 40, you’re entitled to one week’s pay for each full year of employment.
• Aged 41 or older, you’re entitled to 1.5 weeks’ pay for each full year of employment.
There are the following caveats:
• Your weekly pay is defined as the average of the 12 weeks before you received your redundancy notice.
• If you were made redundant on or after 6 April 2022, your weekly pay is capped at £571.
• The maximum number of years of service to be included is 20.
• Statutory redundancy pay is capped at £17,130.
However, your employment contract might include more favourable terms, meaning that you could receive more.
How much notice pay are you entitled to?
Your employer must give you notice of your redundancy, but often, you will receive ‘payment in lieu of notice,’ meaning that you won’t be required to work your notice period but will be paid for it.
There are minimum notice periods based on how long you’ve been employed by the company:
• At least one week’s notice if you’ve been employed between one month and 2 years
• One week for every full year of employment between 2 and 12 years
• 12 weeks’ notice if employed for 12 years or more
How much tax will you pay?
Many people worry about receiving a large lump sum but losing a lot of it to tax. You might be relieved to learn that you can receive up to £30,000 in statutory redundancy pay tax-free. However, notice pay will be subject to income tax at the same rate as your salary.
What if your company is insolvent?
If your employer becomes insolvent, you are still entitled to redundancy pay and notice pay, but you’ll need to apply to the Government for them. You can also apply for any other money you are owed, such as holiday pay, unpaid wages, overtime, or commission.
What should you do with your redundancy pay?
If you’ve received a large payment, you might be wondering how to make the best use of it. The answer depends on your financial circumstances. In many cases, you’ll need this lump sum to cover your living costs until you find a new job. Your priority will be keeping the money in an easily accessible account where you can draw on it for everyday expenses.
In some circumstances, for example, if you find new employment very quickly, you might have leftover cash to save or invest. One priority will be protecting it from tax, in which case you could look at tax-efficient products such as a pension or an ISA.
Whatever you decide with depend on your own personal circumstances, including your investment goals, your other savings and investments, any other sources of income, and the level of risk you’re comfortable with.
Will redundancy affect your retirement plans?
If your expected retirement age is approaching and you’ve been made redundant, it may have crossed your mind to retire now rather than searching for another job. This is certainly an option for some people, but not a decision to be made lightly.
First, you should check the value of your pension, and make sure you’ve tracked down any other pensions you’ve paid into, or an employer has paid into, in your working life.
Next, look at your monthly spending and how it might change over your retirement. Plan not just for the essentials, but for all the indulgences you imagined in your retirement, like long holidays or family treats.
After reviewing your total pension value, how much you’ll receive from the State Pension, along with any other assets you have or income you’ll receive, you can assess whether you have enough to retire now and live the lifestyle you want. Your redundancy pay might make all the difference, particularly if it will help to bridge the gap until you’re entitled to claim the State Pension.
However, taking money from your personal pension now has tax implications for the future. You should be completely sure that this is the right time, and that you’re taking money in the most tax-efficient way.
The content of this article was accurate at the time of writing. Whilst information is considered to be true and correct at the date of publication, changes in circumstances, regulation, and legislation after the time of publication may impact on the accuracy of the article.
Pensions are not normally accessible until age 55. Your pension income could also be affected by interest rates at the time you take your benefits.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means-tested benefits and is not suitable for everyone. You should seek advice to understand your options at retirement.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by interest rates at the time you take your benefits.