Redundant but not ruined
There are three big financial decisions to make if you lose your job. Jean Eaglesham explains
Sunday 14 April 1996
More than 500,000 people were made redundant in the first nine months of last year alone, according to the most recent Government figures. If your employer decides to add you to these statistics, cool-headed financial decision-making and planning will be vital. The three big areas to think about are your pension, your mortgage and investing any lump sum pay-off.
The last decision is the easiest one: most financial experts recommend that you do very little with the lump sum at first. "The biggest risk is that you spend all the money straight away, or stick it in long-term investments, without taking stock of your new circumstances," warns Nick Conyers of the independent financial adviser Pearson Jones & Co.
If you've got an overdraft, credit card debt or other short-term debt, it's probably worth clearing it. The interest on the debt is invariably higher than the interest from a savings account. If you've already got a new job lined up then the rest of the lump sum is in effect a windfall payment to spend or invest however you want.
But if you haven't got a new job, the best bet is usually to put most of the money in a straightforward savings account paying a reasonable rate of interest but remaining accessible. Just leave it there while you sort out your next employment moves and review your general financial position.
Be wary of financial advisers who may recommend putting the funds immediately into medium- to long-term investments, which pay them commission, rather than savings accounts, which don't. It is, however, worth getting professional advice on whether to switch some of the money into longer-term investments if you get a new job, or alternatively three to six months after you have been made redundant.
Depending on how generous your ex-employer was, difficult decisions about investments may be a luxury that you wish you could afford. The other side of the redundancy coin is the financial hardship brought by a sudden loss of income.
If you've got a mortgage, talk to your lender as soon as possible if it's going to be difficult to meet the repayments. Possible options for easing the short-term burden include extending the term of the mortgage, making interest-only payments or suspending the payments altogether for up to six months.
While taking up one of the attractive remortgage deals currently on offer might seem another option for reducing your outgoings, this route has its traps. A new lender is likely to make checks with your former employer which uncover your redundancy and therefore your eligibility for the loan. In addition, by remortgaging with a new lender you reduce your eligibility for state help to pay your mortgage.
You can get free debt advice by contacting your local Citizens Advice Bureau. As well as giving general advice, a debt counsellor will negotiate with creditors such as banks and credit card companies on your behalf.
The third key area to decide on is what to do about your company pension.
If you're young, the main pension decision is the same as if you move on from a job voluntarily: either to leave the accumulated benefits where they are or to move them to a personal pension plan or a new employer's scheme. Get independent advice.
If you're over 50 years old, you're almost certainly best off not moving your accumulated pension pot into a personal plan because start-up charges will disproportionately handicap your ultimate returns.
You'll probably also have the option of taking early retirement. This is less dramatic than it sounds; it doesn't, for example, mean that you can't get another job in the future. But because you start drawing on your company pension early, you'll get a lower pension than if you wait until you're 60 or 65. The income from your pension could also push you into a higher tax bracket if you do get another job.
The financial pros and cons of taking early retirement depend on what you're offered. According to Ron Spill, a pensions expert at insurer Legal & General, the deals that schemes offer long-serving employees who are made redundant are "all over the place". However, as a guide, the most generous will pay an immediate pension based on the years you've already worked with the company plus half the years left until the standard retirement age.
Be wary of one fairly common tax wheeze. The first pounds 30,000 of any redundancy payment is tax-free. If you're taking early retirement and you're in line for a bigger pay-off than this, some advisers recommend asking your employer to put the extra money into your pension scheme and increase the tax- free lump sum you can take from the plan. This is fine in theory, but Craig Foreman of accountants Deloitte & Touche warns that the Revenue is taking a tougher stance on this approach.
"If you're over 50 and do this, there is a risk that the Revenue will decide the payment is a retirement benefit and so tax the whole lot, not just the excess over pounds 30,000," he says.
q Jean Eaglesham works for 'Investors Chronicle'.
House insurance costs are falling, according to a survey by AA Insurance. Building rates have fallen by an average of 9 per cent over the past year, and home contents policies by more than 5 per cent. These price cuts have been outpacing those on motor insurance, a market better known for fierce competition.
Graduates are starting their working lives with bigger debts, says research by Barclays Bank. Six months after leaving university, 1995's graduates owed an average of pounds 2,930, against pounds 2,236 for the class of 1994. However, graduates who find jobs are also earning more: the average graduate salary was pounds 12,248 at the end of 1995, up 7 per cent on the year before.
The Ethical Investment Research Service has published a guide, Money & Ethics, which details the investment criteria of a range of PEPs, pensions and other savings plans which brand themselves as ethical or green. The guide costs pounds 12.50 and is available from bookshops or Eiris on 0171-735 1351.
The Inland Revenue has published a new guide to the tax treatment of income received from letting out property. A Guide to Property Income includes details of what expenses can be offset against rental income, as well as the rules on overseas property. Free copies are available from your local tax office or from the Public Enquiry Room, West Wing, Somerset House, Strand, London WC2R 1LB. Rooms to Let (IR87), a Revenue leaflet, is a simpler guide to the main rules.
Before you leave your job:
q Check your contract and get advice from any trade union or professional body you belong to. If you're uncertain of your legal rights, such as the minimum pay and notice period, you can get free help from your local Citizens Advice Bureau. The Government also runs a free redundancy helpline (0800 848489).
q Ask your employer to confirm in writing that you're being made redundant, rather than being sacked or resigning. This will avoid a potential delay of up to six months in state benefits.
q If your job offers free life or medical insurance, ask your employer if this can be extended for a short period after you leave work, or if you can renew it without further medical checks. Some employers will extend it for free as a perk. Even if you have to pay for it, it could be cheaper than buying on your own.
q Make sure you get any holiday pay or pay in lieu of notice that is owed to you.
q Check your employer gives you the P45 income tax form.
q If you've got share options, most employers will let you exercise those options within six months of being made redundant. Check before you leave.
Once you've left:
q Sign on the dole, even if you're not entitled to unemployment benefit. This ensures you get National Insurance credits for your state pension and sickness benefit entitlement.
q Draw up a budget.
q If your finances look tight, contact your mortgage lender. There are options for reducing or deferring payments, but the sooner you negotiate these with your lender, the better. You can get free debt advice by contacting your Citizens Advice Bureau.
q If you've got a lump sum, don't rush to invest it. Wait to get a clearer view of your future financial and employment prospects.
q If it's unlikely that you'll work again during the current tax year, which runs until 5 April 1997, you're probably entitled to a rebate of some of the tax you've already paid on your wages or salary. Apply to your tax office.
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