Being made redundant can turn your finances upside down almost overnight.
One month, you have a regular salary coming in and your financial plans feel relatively predictable. The next, you may have a redundancy payment sitting in your bank account and no certainty about when your next salary will arrive.
It can be tempting to make immediate decisions.
Should you pay off the mortgage? Put the money into your pension? Invest some of it? Cut every unnecessary expense? Or simply leave everything in cash until you find another job?
The answer will be different for everyone.
But before making any big decisions, it can help to work through your finances in a sensible order.
First, understand exactly what you’re receiving
Before deciding what to do with a redundancy payment, make sure you understand what the payment actually includes.
Depending on your circumstances, your final payment from your employer could include several different elements, such as:
- statutory or enhanced redundancy pay
- your final salary
- payment for unused holiday
- bonuses or commission
- payment in lieu of notice (PILON)
- other contractual payments.
These payments don’t necessarily receive the same tax treatment.
In general, qualifying redundancy payments can potentially be paid tax-free up to £30,000, while amounts above the exemption may be taxable. Other parts of your final pay, such as salary, holiday pay and payments in lieu of notice, are normally subject to Income Tax and National Insurance in the usual way.
Understanding what you’re actually going to receive – and how much will arrive in your bank account after tax – gives you a much clearer starting point.
Don’t be too quick to spend the lump sum
A redundancy payment can sometimes be one of the largest lump sums someone has received outside of buying or selling a property.
That can make it feel like an opportunity to do something with the money.
But when your future income is uncertain, having accessible cash can be extremely valuable.
Before making additional mortgage repayments, investing a large amount or locking money away into a pension, ask yourself a more immediate question:
How long could I manage financially if I didn’t find another job as quickly as I hoped?
If you normally spend £3,000 a month and have £18,000 readily available, that’s very different from simply thinking, “I’ve got £18,000 in savings.”
Thinking in terms of months rather than just pounds can make your financial position much easier to understand.
Protect your emergency savings
Redundancy is exactly the kind of situation an emergency fund is designed for.
If you already have one, think carefully before using it for anything other than its intended purpose.
If you don’t have much set aside, part of your redundancy payment could potentially become your financial safety net.
How much you need will depend on your circumstances.
Someone with a partner whose income comfortably covers the household bills may be in a very different position from someone who is the sole earner, has children and a large mortgage.
Your industry matters too. If you expect to find another job within a few weeks, your needs may be different from someone working in a sector where recruitment typically takes much longer.
The important thing is to give yourself some breathing space.
Review what’s going out every month
You don’t necessarily need to react to redundancy by cancelling everything you enjoy.
But it is a good time to understand exactly what leaves your bank account every month.
Separate your spending into essentials and things you could temporarily reduce or pause.
Mortgage or rent, utilities, food, insurance and other core household costs will naturally take priority.
Then look at everything else.
Subscriptions, memberships, meals out, holidays and other discretionary spending may offer opportunities to reduce your monthly outgoings while your income is uncertain.
Even reducing expenditure by a few hundred pounds a month could significantly extend the amount of time your savings and redundancy payment will support you.
This isn’t about assuming the worst.
It’s about buying yourself time.
What should you do about your pension?
When you’re made redundant, pension contributions are unlikely to be the first thing on your mind.
If you’ve been contributing to a workplace pension, your employer’s contributions will normally stop when your employment ends.
The pension itself doesn’t disappear. The money already accumulated remains yours and stays invested, subject to the scheme rules.
Once you understand your short-term financial position, you can consider what you want to do next.
You might decide to leave the existing pension where it is. You might eventually consider combining it with another pension. Or, depending on your circumstances, you may want to make personal pension contributions.
But be careful about putting too much of your redundancy payment into a pension before you’ve considered your need for accessible cash.
Pensions can be tax-efficient, but money paid into them will usually be inaccessible until you reach the relevant minimum pension age.
If you’re between jobs and don’t know when your next salary will arrive, flexibility can be particularly valuable.
Should you keep investing?
Periods of personal uncertainty can also change the way investment risk feels.
Perhaps you’ve always been comfortable with market fluctuations because you had a secure salary and weren’t planning to touch your investments for many years.
Being made redundant can change that perspective.
The important distinction is between money invested for the long term and money you may suddenly need in the short term.
Selling investments simply because you’ve been made redundant isn’t automatically necessary. Equally, relying on investments to cover living costs without considering market conditions and your overall plan could create problems.
If markets fall at the same time you need to withdraw money, you may be forced to sell investments at an unfavourable time.
That’s why having sufficient cash available can be particularly important during periods of uncertainty.
Your circumstances may have changed, even if the investments haven’t.
Don’t forget about tax
The tax position surrounding redundancy payments can be confusing.
While the first £30,000 of a qualifying termination payment can generally be paid free of Income Tax, that doesn’t mean your entire final payment will automatically be tax-free.
Salary, bonuses, holiday pay and payments in lieu of notice are normally treated differently.
If you receive a substantial payment, it can therefore be worth understanding exactly which elements are taxable before deciding how much money you genuinely have available.
It may also be worth considering the wider tax year.
For example, if your income falls significantly after redundancy, your overall tax position for that year could look very different from what you expected when you were employed.
Tax rules can be complicated, so seek appropriate advice if you’re unsure how your redundancy package will be treated.
Think about replacing your income – not just replacing your job
Naturally, finding another job may be the priority.
But it’s also worth looking at the wider picture.
Could your partner’s income temporarily cover more of the household expenditure?
Are there benefits or other financial support you may be entitled to?
Do you have income from savings, investments, rental property or another source?
Could temporary or consultancy work provide some income while you search for the right permanent role?
The aim isn’t necessarily to replace your previous salary immediately. Even some additional income could reduce the amount you need to withdraw from your savings each month.
That could give you more time to make the right career decision rather than feeling pressured into accepting the first opportunity available.
Your financial goals may need to change – temporarily
Before redundancy, you may have had a very clear plan.
Perhaps you were overpaying the mortgage, investing every month, saving for a holiday or aiming to retire at 60.
Those goals don’t necessarily need to disappear.
But their priority may need to change.
If your income has stopped, building financial resilience may temporarily become more important than making additional investments or mortgage payments.
You can revisit those goals once your income becomes more predictable again.
A financial plan shouldn’t be so rigid that it can’t cope when life changes.
What if you’re approaching retirement?
Redundancy can feel particularly significant if it happens in your 50s or 60s.
You may find yourself asking a much bigger question:
Do I actually need another job?
Perhaps you were planning to retire in three or four years anyway. Could your redundancy payment, savings and pensions allow you to bring that date forward?
Or could you move into part-time work rather than finding another full-time role?
This is where financial planning and cashflow modelling can become particularly useful.
You can explore different scenarios, such as finding another full-time job, working part-time, retiring earlier than planned or using savings to bridge the gap until pensions or State Pension become available.
Rather than guessing whether you can afford it, you can see how the different choices could affect your finances over the longer term.
Give yourself a financial order of priority
Redundancy can make everything feel urgent.
In reality, not every financial decision needs to be made immediately.
A sensible starting point could be:
Understand what you’re receiving. Protect enough cash to cover your immediate needs. Work out your essential monthly expenditure. Review your income options. Then consider the longer-term decisions around pensions, investments and other financial goals.
That order matters.
Making an irreversible long-term decision before you understand your short-term position can leave you with less flexibility at exactly the time you need it most.
Redundancy can change the plan – but it doesn’t have to derail it
Being made redundant can understandably create financial uncertainty, particularly when you don’t know how quickly your next opportunity will come along.
But it can also be a useful point to reassess where you are.
What do you actually spend each month?
How much financial resilience do you have?
Are your pensions and investments still appropriate?
Have your priorities changed?
And are the financial goals you were working towards still the right ones?
At Lazenby’s Financial Services, we believe a financial plan should be able to adapt when life doesn’t go according to plan.
If you’ve recently been made redundant, or you’re expecting redundancy, reviewing your savings, pensions, investments and longer-term goals can help you understand your options before making significant decisions.
Sometimes the most important financial decision after redundancy isn’t deciding where to put the money.
It’s giving yourself enough time and flexibility to decide what comes next.
This article is for general information only and does not constitute financial, investment or tax advice. Tax treatment depends on individual circumstances and tax rules can change. If you’re unsure about the tax treatment of a redundancy package or what to do with pensions and investments following redundancy, seek appropriate professional advice.
