'People can topple off a financial cliff so easily'

As unemployment mounts, Julian Knight looks at the rights of </p><p>the newly jobless and asks how those who fear the worst can prepare for it
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The Independent Online

the newly jobless and asks how those who fear the worst can prepare for it

Unemployment is back with a bang. The official jobless figure jumped by 60,000 in the three months to the end of June and now stands at 1.67 million. And with recession looming, worse may follow. No wonder the national charity Citizens Advice has told The Independent on Sunday that it is bracing itself for a rush of people seeking help in the wake of redundancy.

That sentiment is echoed by others who deal with the aftermath of job losses.

"We have seen the number of people enquiring grow by around a quarter so far this year," says Simon Champion, chief executive of advice website Redundancyhelp.co.uk. "And reading the runes, I can only see it increasing further."

He continues: "One of the major problems we face is that there is a real divide when it comes to redundancies. People who work for big firms are taken care of: they get decent payoffs and receive help with their next career step.

"But the other half of the working population – who we tend to deal with – turn up one day and find a chain across the front door of the business and are only entitled to the bare minimum."

So what are your rights if you end up being made redundant, and what should you be doing right now to protect yourself in case the axe falls?

Under the law, those staff losing their jobs who have a record of more than two years' service at their company are entitled to severance pay. This is capped at £330 for each full year they have worked for their employer. This £330 figure is way below the average national weekly wage and even then it has caveats attached.

For example, workers under the age of 22 are entitled to half that amount for each full year they work, and the number of years of service that can trigger severance pay is capped at 20.

"Statutory severance pay is paltry, and if you have been used to anything above the minimum wage, it will be quite a shock," says Mr Champion. "People can fall off a financial cliff so easily when they are made redundant, and this is at a time when their emotions are shaken up."

Those who receive more than the statutory minimum have to keep one eye on HM Revenue & Customs. Under tax rules, the first £30,000 of redundancy pay is tax free; above this and it will be treated as income by the Revenue. Bear in mind that items such as cars or laptop computers, which may be included in a "golden goodbye", are counted towards the £30,000 tax-free allowance.

The "financial cliff" that Mr Champion describes is familiar to the debt charities. "Along with divorce, sudden redundancy is a major reason for people falling behind with their mortgage or other debts," says Frances Walker from the Consumer Credit Counselling Service.

"Suddenly the income stops and people don't have enough to tide them over until they find a new job."

There is government assistance available but this, adds Ms Walker, is inadequate. "People need to prioritise their debts and make sure they pay their council tax and mortgage first," she explains. "There is help with paying interest on a mortgage debt from the government but this doesn't kick in for nine months after redundancy. We tell clients this and they are often shocked they will have so long to wait as they need the money now."

With repossessions predicted to rise by 50 per cent this year, Ms Walker says the Government ought to look at reducing the time that jobless homeowners have to wait before they can claim help with their mortgage interest.

Ms Walker also recommends that newly unemployed people take other action to keep their heads above water.

"It may seem obvious but you need to draw up a bud-get as soon as possible, detailing all your income and outgoings. Check on your benefits situation. For example, the unemployed qualify for discounted council tax."

But if, after doing the number crunching, the figures still don't add up, then take the initiative, she adds. "If you find that your debts aren't covered, you must talk to your lenders; your mortgage is the priority and the rest take a back seat. In my experience, unsecured lenders such as credit-card and personal loan firms tend to shout the loudest – but don't let that distract you. Above all else, whatever you do, don't take on new debt."

As for those who are currently in work but can feel the icy chill of recession and possible redundancy, Ms Walker recommends they act sooner rather than later to put their financial house in order.

"Focus on paying down debts – the first to look at are the expensive unsecured ones. Then use the money freed up to start building up a savings buffer; you should aim for the equivalent of three months' salary at least."

She also suggests taking out cover against redundancy. "One of the first things our debt advisers ask is whether the client has mortgage or credit-card payment protection insurance (PPI). You would be surprised how many people have these products without realising it. If you have them, use them."

However, PPI is a highly controversial area, with consumer groups describing the industry as a "scam" because of the high profit margins achieved by providers and the exclusions on claims that are often buried away in the policy small print.

The critics found support in June when the Competition Commission criticised industry sales tactics and concluded that PPI providers were overcharging their policyholders by a massive £1.4bn a year.

"People should avoid PPI as much as possible," says David Kuo from financial advice website Fool.co.uk.

"It's expensive and is often mis-sold. We have heard of many cases where people don't realise they are taking it out or are sold the insurance despite the fact that they can't possibly make a claim because they are self-employed."

Instead of PPI, Mr Kuo suggests taking out stand-alone income-protection insurance. "The advantage of this is that it pays out an income you can live on, rather than simply servicing debt repayments. What's more, the terms and conditions tend to be fairer and you are covered in cases of accident and illness as well as unemployment. Compared to PPI, it is better value"

However, be aware that income protection only normally pays out between 50 per cent and 75 per cent of the policyholder's weekly wage, so there is still likely to be a shortfall.

"This is where the savings buffer comes in," says Mr Kuo. "When you are made redundant, it's crucial to give yourself some breathing space so that you have the time to find a job that meets your needs."

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