Could Redundancy Mean Taking Early Retirement?
Along with furlough schemes and business bailouts, redundancy has been a very real part of 2020. Redundancy carries with it a certain set of rules, including redundancy pay for anyone who has been at their job for two years or more. This is usually:
- half a week’s pay for each full year you were under 22
- one week’s pay for each full year you were 22 or older, but under 41
- one and half week’s pay for each full year you were 41 or older
Length of service is capped at 20 years but, depending on your age and circumstances, redundancy may actually offer an opportunity for early retirement.
Advantages and disadvantages of early retirement
Early retirement can be an appealing prospect, especially if you are looking to seriously change your lifestyle, if you’re no longer enjoying your job, or if you have health concerns. However, it is important to consider some of the downsides as well, such as:
- Smaller pension. You’re likely to receive a smaller pension than if you worked until normal retirement age, unless your employer is offering a substantially enhanced package
- No State Pension right away. The earliest you can usually start taking a workplace pension is 55, but you won’t get a State Pension until your mid-60s, or later depending on your current age
Redundancy as an opportunity
Whether you opt to take voluntary redundancy, have been made redundant or choose early retirement with incentives provided by your employer, receiving a lump sum can accelerate retirement plans considerably.
Redundancy pay is compensation for your job loss and qualifies for special tax treatment, with the first £30,000 payable tax free. If you receive a payment of more than £30,000 or receive a payment in lieu of notice, this would normally be subject to tax at your marginal rate. You may be able to avoid paying tax on this amount by paying it into a pension instead.
For example, if you are a member of your employer’s pension scheme, you could ask your employer to pay the excess above £30,000 directly into your pension. The boost to your pension could be worth nearly double the net amount you’d get if you took the bonus as cash.
It will also give you more tax-efficient planning options for the future – a well-earned and perfectly timed extra payment to your pension pot just before you head into retirement. Ultimately, the most important thing is to feel comfortable with your decision no matter what, and a great way to make sure that you are is by consulting a financial adviser.
Speaking to a professional
If you have been made redundant unexpectedly, there are certain questions you may want to ask yourself:
- Will I have enough to live on?
- Will I still be able to support my family?
- How can I access my money?
- What’s the best way to use my redundancy payment?
- How can I minimise tax?
By consulting a reputable financial planner, you can explore your options and be provided with a tailored plan designed to meet your individual needs and feel prepared whatever comes next.
If you would like to talk to a member of the team here at gpfm, please don’t hesitate to get in touch over email firstname.lastname@example.org or call 01992500261.
This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.
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