Investing a Redundancy Payment
Redundancies often come with the silver lining of a substantial redundancy payment. For many people, this will be the largest cash amount they’ve ever had. If you can resist the temptation to salve your redundancy-wounded self-esteem by splashing out on a Porsche or a new wardrobe, you should think about investing it.
Boosting Your Pension
Remember that only the first £30,000 of your redundancy payment is tax-free. If you are expecting a payment in excess of this, one way of avoiding a hammering from Mr. Taxman is to ask your employer to pay a chunk of your redundancy payment into your pension fund rather than giving it to you directly. Your employer does not have to agree to do this, but most will.
You can also pay a certain amount into your pension on your own initiative tax-free. In some circumstances, you’ll be able to take a lump sum back out of your pension afterwards, again tax-free.
Clearly, this option would only be a sensible one for you if your financial circumstances are such that you will not need access to the money in the short or medium term.
Using a Redundancy Payment to Pay Off Your Debts
Before contemplating investing in shares or anything else, you should first consider using your redundancy payment to pay off any debts you have. It obviously makes little sense to put your new lump sum into a savings account which will earn you 6% per year if you have substantial credit card debts which you’re paying 12% per year on.
If your redundancy payment is a sizeable one and you have a mortgage, you could consider paying it off. This offers peace of mind and helps you avoid some of the potential ravages of the taxman, but can limit your future flexibility.
Paying off debts isn’t always the best thing to do, though. You should think about whether you are going to need the money from your redundancy payment as working capital in the near future. For example, it may be that you have to relocate to find another job. You might need some or all of your redundancy payment to help defray your relocation expenses.
What to Invest Your Redundancy Payment In?
First of all, you should put your redundancy payment into a high interest savings account while you think about what else to do with it. If the redundancy payment is a significant sum, you talk with an independent financial adviser for recommendations on how best to invest it. What constitutes a good investment from your perspective depends to a great extent on your own current and likely future circumstances, your own attitude towards risk as well as the prevailing conditions in the economy. It is therefore difficult to offer general recommendations.
What can be said is that ISAs (Independent Savings Account) are excellent tax-efficient savings instruments, available in a variety of forms to suit your requirements. You are limited in how much you can put into an ISA in any one year, however, so if your redundancy payment is a large one, you will need to look beyond ISAs, perhaps at shares or property.
Investing Your Redundancy Payment – Conclusion
That Porsche may look tempting, but in your heart of hearts you know there are far better ways to invest that redundancy lump sum. Consider your options carefully, and perhaps talk with an adviser, to find out what would be best for you.
Comments...
