How can you deal with redundancy?
With a consistently low unemployment rate, one of the many draws of the Isle of Man has been its job security. We’ve always felt ‘cushioned’, to an extent, against the wider economic disruptions that can lead to devastating job losses.
Recently, with the sad news that up to 80 staff at PokerStars are at risk of redundancy, it’s all started to feel a little too close to home.
To suddenly find yourself unemployed will always be a nasty shock. But it is a situation that can be prepared for and can be controlled with good advice and assistance.
Sharon Sutton, Founder and Managing Director of Thornton Chartered Financial Planners, was once made redundant. However, almost 20 years she went on to set up her own business, this one(!) as a result of it.
The prospect of redundancy is becoming very real for more and more people, in light of worsening economic conditions and cutbacks in government and company spending.
Redundancy may occur for a number of reasons and with every redundancy comes a whole series of important decisions to make about your life, and how you (and maybe your family) will cope with losing your income.
Every redundancy is different because every person who experiences redundancy will have very different circumstances, goals and objectives. However, there are some common areas of concern that may need to be addressed.
Legal advice can ensure that you maximise the benefit of your redundancy package; deal with a specialist. In the same way Financial Planning ensures that you structure your finances in the most effective way to ensure you remain on track to live the best life possible with the money you have.
The best planning for redundancy takes place long before the subject is even raised by your employer.
The two most valuable things you can do in anticipation of redundancy are to cut down on your expenditure and create an emergency savings fund.
This will give you sufficient breathing space to assess all of your options and, if necessary, find new employment. We would recommend an emergency fund equivalent to three to six months’ typical expenditure. This money needs to remain accessible in the event of a real financial emergency but not too easy to access, in case you are tempted to dip into the fund. A bank or NS&I deposit account is often a sensible home for your emergency fund rather than leaving it in your regular account.
Before you rush off to seek such a policy, it is usually only available when attached to another plan as a ‘bolt on’ such as mortgage protection life cover and usually at outset of the policy. This needs to be done before impending redundancy or you won’t be able to make a successful claim.
Such plans typically cover the monthly repayment of your mortgage and only normally last for 12 months because the insurer usually expects the claimant to have secured replacement employment during this time. Voluntary redundancy is not covered, nor is being fired. Often there is a 30 or 60 days ‘wait-period’ before paying a claim.
Assuming you have worked continuously for your employer for at least two years, you should be entitled to a redundancy payment. Statutory redundancy payment is not subject to income tax or National Insurance contributions. The amount of redundancy pay you receive will be covered in your contract of employment.
The first £30,000 of any payment on termination of a contract is tax-free as long as it is not in lieu of actual pay; e.g. for gardening leave.
Statutory redundancy pay
The total amount of redundancy pay you receive will depend on a number of factors, including how long you have been continuously employed, your age and your weekly pay.
In the Isle of Man, the amount of a redundancy payment is one week’s gross pay for each complete year for which the employee has been continuously employed. A week’s pay is capped at a maximum of £540 a week.
Refer to Isle of Man Employment Rights: A Summary which can be downloaded here: https://www.gov.im/media/626801/iom-employment-rights-a-summary-0619.pdf
Help from the state
Depending on your financial circumstances, you might qualify for help from the state when you are out of work. Your first port of call should be Job Centre, which will be able to tell you about your entitlement to payments or benefits. If you have a partner who works 24 hours or more a week, or if you or your family/partner has over £13,000, you will not be entitled to receive the income-based component of jobseeker’s allowance.
However, you could still qualify for the contribution-based jobseeker’s allowance, assuming you have paid or been credited with class 1 national insurance contributions in the relevant tax years. This can provide up to £73.10 per week if you are aged 25 or over. It is £57.90 per week for under 25s.
Loss of protection benefits
Redundancy often results in the loss of valuable employee benefits previously provided by your employer as part of your remuneration package. These employee benefits might include death in service and private medical insurance.
Redundancy (like any life event) should serve as a prompt to evaluate your protection requirements, identify any shortfall in cover and put in place a suitable protection arrangement.
Make sure you shop around to identify the most competitive provider as the costs vary between the most and least expensive provider of these financial products. Also make sure the cover is eligible for Isle of Man residents.
As it can take a number of weeks to underwrite some forms of financial protection, particularly if you require substantial amounts of cover or have a complicated medical history, it is worth starting this process early when the topic of redundancy is first raised by your employer. This will put you in the position where you can put the new cover on risk as soon as existing benefits come to an end, therefore preventing any time gaps in your cover.
Depending on your age at the time redundancy occurs, retirement is likely to be a serious consideration. As this is likely to be early retirement (or at least earlier than originally planned) you will need to look carefully at affordability. After all, you are younger so your pension benefits will have had less time to accumulate and will need to last for longer.
Early retirement prompted by redundancy is a good opportunity to re-evaluate your lifestyle and the associated living costs. Your pension might produce lower benefits than originally predicted, but this is all relative. Lower pension benefits are manageable when combined with a lower cost of living.
Dealing with debt
Debt is a drag on your ability to meet your other financial objectives. Over a decade ago, the global ‘credit crunch’ highlighted some of the risks of funding your lifestyle with unsecured debt. What starts off as cheap and easily accessible can quickly become expensive and in short supply.
There are two main types of debt – unsecured and secured.
Unsecured debt typically includes items such as credit cards, store cards, personal loans and overdrafts, is usually short-term and more expensive than secured debt.
Secured debt usually refers to your mortgage. It is secured because there is an asset (e.g. your house) guaranteeing the value of the debt.
Time for advice
As a result of the complex interplay between the different areas of your personal financial planning, it is important to seek professional and regulated financial advice to ensure you have considered all of your options and made the most suitable decision based on your personal circumstances.
It makes sense to seek advice at an early stage of the process as otherwise you could be in a panic to make important decisions ahead of tight deadlines that have been imposed. It can take time to request detailed information and conduct analysis ahead of providing advice to a client who is being made redundant.
Finding an adviser
The best way to check the provenance and ensure you have fully protected consumer rights when selecting a professional adviser is to go online to our regulator’s website: https://www.iomfsa.im/
Usually your friends, family or colleagues are happy to recommend someone, but bear in mind that talking about money remains a taboo for many people.
You can find our licensed credentials here: https://www.iomfsa.im/registers/licence-holders/thornton-associates-ltd/
We also have a number of helpful articles relating to other relevant areas about planning for a fulfilling future here: https://www.thorntonfs.com/category/lifes-transitions/