Getting a redundancy payment can help soften the financial worry of losing your job. But working out what to do with your redundancy package can be a bit of a minefield. Whatever you decide, it’s important not to leave the lump sum in a bank account that doesn’t pay any interest.
First, check all the money’s yours
How much redundancy pay?
You can work out your statutory redundancy pay using the calculator on the GOV.UK website
Even if the money’s in your account, it’s important not to assume your employer has got their tax calculations right.
- You might owe extra tax on your payout – this is usually only if your redundancy payment exceeds £30,000. So, before spending the cash on other things, contact HM Revenue & Customs (HMRC) to check you don’t owe any tax. Contact details for HMRC are on the GOV.UK website
- The tax you owe depends on your income from all sources for the whole year. So it might not be possible to know at this stage if you’ll have to pay extra tax. It’s best to put some money aside just in case.
Use your lump sum as regular income
Even if the money is for everyday use, you won’t need it all at once. It’s best to leave it in an easy-access savings account, or a current account that pays interest.
Your redundancy pay can also double up as an emergency fund for unexpected costs. If you have to use the money, try to build it up when you return to work.
There’s no rule about how big the pot should be, but most people aim for three to six months’ spending.
Keep up payments on essential extras
If your employment package included extras, such as private health insurance or a car allowance, you might want to budget for them, or consider doing without.
Clear your debts
Interest charged on debts is nearly always higher than the interest paid on savings. So it almost always makes sense to pay them off.. There are exceptions
- if you have interest-free (or very cheap) debt, or
- if there are penalties for early repayment.
Join our Facebook group
We’ve set up the Debt Support Community private Facebook group to help give you new ideas to tackle debts and keep you motivated.
Paying into your pension
You might want to put some of your redundancy pay into you pension, but there are some things you need to consider, including what kind of pension you have and how much you want to put in.
Learn more about your pension options if you’re made redundant
Invest in other ways
Many people who don’t need their redundancy money straight away decide to save it or invest it.
Deciding where you want to save or invest will depend on:
- how long you plan to save
- how quickly you want to be able to get at your money
- and how much risk you’re prepared to take.
If, for example, you get a £20,000 lump sum, you might want to keep some of it for everyday use and invest the rest.
Start your own business
Redundancy could be the opportunity you’ve been waiting for. But setting up the business you’ve always dreamed of is not without its pitfalls.
It’s important to plan, prepare, and do as much research as you can before committing any cash.
Get some training
Paying for retraining to broaden your skills could make you more employable in the future. Or it might give you the confidence to start something completely new.
But remember that training could make you unavailable for work and affect your entitlement to benefits.
