Rather than simply replacing lost income, your pension, savings, and redundancy package combined could open up more options than you realise. This could include retiring earlier than planned, changing careers, starting a business, or simply taking some time to work out what comes next.
An independent financial planner can help you make the most of your redundancy package and build a plan that supports your next chapter.
Read on to find out how to protect your pension and tax position if you’ve been made redundant, and how you can make the most of the opportunities that come from it.
Your redundancy payment may be taxed
One of the first things to consider is how much of your redundancy package you’ll actually receive after tax. Though it’s important to remember that tax treatment depends on individual circumstances and may change in future, and this article is for general information only and should not be treated as tax advice.
The first £30,000 of redundancy pay is typically tax-free and exempt from National Insurance (NI). Any amount over that threshold is taxed as income but is still exempt from employee’s NI, though it may still be liable for employer’s Class 1A NI. Other elements of your package, such as holiday pay, bonuses, or your normal salary, may be taxed as regular earnings.
Understanding which parts of your package are taxable can help you plan how to use the money more effectively.
For example, if you don’t need all of it immediately, you could contribute some to your existing pension or set up a new private pension to help improve the growth and tax efficiency of the payout while also boosting your retirement savings.
You may also want to make full use of your annual ISA allowance to protect any interest or returns the payout generates from tax.
Redundancy is a good time to assess your financial position
After redundancy, it’s important to take stock of your finances and get a clear picture of where you stand.
Start by reviewing your household budget and identifying your essential monthly spending, including any outstanding debts. It’s also worth checking any protection policies you may need to update, such as health or life insurance, especially if they were provided through your employer.
Once you have a clear understanding of your short-term financial position, check your pension, savings, and investments, so you can start thinking about how best to use your redundancy payment.
You can also consider how the funds could help your other long-term goals. That might include supporting your family, paying off your mortgage, or building an investment portfolio to generate income in the future.
An independent financial planner can use cashflow modelling to map out your spending, assets, and plans to show how different decisions could affect your finances over the years ahead. They can also factor in variables outside your control such as inflation, investment returns, and life expectancy to give you a clearer picture of how resilient your plan is.
Redundancy could lead to a life change or an early retirement
After years in the same career, redundancy may be your chance to rethink what you want from the next phase of your life.
Perhaps you’ve spent decades in a high-pressure role and want more time for family, travel, hobbies, or volunteering. You might decide to pursue a passion you’ve never had time for, start a business, work as a consultant, or simply enjoy a slower pace of life that prioritises your health and wellbeing.
A redundancy payment can provide the breathing space you need to make those decisions. Rather than asking, “What job do I need next?”, you can begin by asking, “What kind of life do I want to build?”
Again, cashflow modelling can be particularly useful here. By mapping out different scenarios, it can show whether your plans are financially achievable, how long your savings and pension might last, and whether you could afford to retire, reduce your hours, or take a different path altogether.
Having a clear understanding of what is achievable in your new position means you can make decisions with peace of mind knowing the financial essentials have already been taken into account.
It’s important to understand how redundancy could affect your pension planning
While your pension may seem like the obvious place to replace lost income, accessing it too early could have consequences for your long-term financial stability.
So, before drawing from your pension, consider the following questions:
– Have you reached the normal minimum pension age (NMPA)?
This is the earliest age at which you can usually take money from your pension without incurring tax charges of up to 55%. The NMPA is currently 55 but is due to rise to 57 from 2028.
– Do you have a tax-efficient withdrawal plan?
Although you can usually take up to 25% of your pension tax-free, most withdrawals above this are subject to Income Tax. Taking more than you need could push you into a higher tax band, which could reduce the value of your payout and retirement savings, so it’s important to have a tax-efficient plan in place.
– Could you trigger the Money Purchase Annual Allowance (MPAA)?
Once you start taking taxable income from a defined contribution (DC) pension, the MPAA is triggered. This reduces your pension Annual Allowance to £10,000, which could be an issue if you return to work and want to continue making contributions.
– Have you checked your State Pension entitlement?
If redundancy means you leave work earlier than expected, it’s worth checking your National Insurance record to make sure you’re still on track to receive the full State Pension. You typically need 35 qualifying years.
Taking extra time to plan when and how you access your pension could help your retirement savings last longer and give you greater flexibility over the years ahead.
An Amber River financial planner can help you make the most of redundancy
Redundancy can feel like the end of one chapter, but it may create more opportunities than you initially realise.
An Amber River financial planner can help you understand the financial implications of your redundancy, explore different scenarios, and then create a plan based on your new position to help you achieve your goals – perhaps earlier than you expected.
With careful planning, your redundancy could become the start of a more flexible and fulfilling future.
Get in touch
If you’ve been made redundant and are unsure what it could mean for your pension, tax position or retirement plans, speaking to a financial planner can help you understand your options, test different scenarios and build a plan around what comes next.
To set up an initial appointment with an Amber River financial planner, call 0800 915 0000, or complete our contact form here.
This is important:
We’ve written this article purely for general educational purposes. It’s not investment advice, or an invitation or inducement for you to invest your money. The information in the article can go out of date over time too – thanks to law and tax rule changes.
Your situation will be unique to you, and that’s why you should always seek personalised advice from a qualified financial adviser before taking any action.
