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Investing a Redundancy Payment

By: Paul Geraghty - Updated: 17 Jul 2018 | comments*Discuss
 
Redundancy Payment Investing Finance

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.

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Hi I am 'at risk of redundancy' after 17 years at my company.My current role does not exist under the new structure and I have been advised that I may apply for other roles in the new structure and there is also the chance of redeployment. They have also mentioned that the voluntary severance scheme is now open for a restricted period of time.I am confused as to why the voluntary severance scheme has been mentioned as it would pay out more than the statutory redundancy scheme.Under what circumstances would they want to pay out under the voluntary severance scheme.Any views on this are welcome.
Hayley - 17-Jul-18 @ 5:26 PM
I was made redundant, I got an enhanced payment. I was terminated over 6 weeks ago. I have now been offered a job in the same company but in a different section. will they ask for my severance pay back if I accept the offer? I have been paid severance and all the shares. Currently they are taking me through the onboarding process for SC clearance. I didn't go through the redeployment process, I applied externally for the role.
Sib - 8-Dec-17 @ 4:22 PM
Hi, my partner is being made redundant on the 31st of August this year and will receive £13,000, I'm currently on maternity leave and am unsure If I'm able to return to work because of his hours changing and childcare!! Will his payment affect what we are entitied to in tax credits? Thanks.
Hj123 - 21-May-17 @ 1:55 PM
Baltizar1958 - Your Question:
I have just recently been made redundant after working for the same company for 17 years. My redundancy payment has been calculated as just over 8K. Will this effect my entitlement to Job Seekers allowance and council tax benefit.

Our Response:
It should not affect your claim for Jobseekers Allowance as JSA is not means-tested. However, it may affect a claim for housing benefit, please see Entilted To link here.
RedundancyExpert - 27-Feb-17 @ 12:32 PM
I have just recently been made redundant after working for the same company for 17 years. My redundancy payment has been calculated as just over 8K. Will this effect my entitlement to Job Seekers allowance and council tax benefit.
Baltizar1958 - 26-Feb-17 @ 6:00 PM
I am being made redundant mid March and will be receiving payment equivalent to 1 years salary £2000.I have a partially disabled husband who receives his government pension and the medium rate PIP.We own our own house.Will my credit rating be affected.I have only ever had one loan apart from my mortgage both of which were fully paid up a few years ago.I will no longer have 2 years continuous employment and that will probably hinder me getting a loan if required. As my husband is disabled I was hoping to be able to get a loan to install a downstairs toilet which may involve some extending of the house or at least a decent stairlift for him. Considering the employment situation at the moment and the fact that I am unskilled and can't drive limits my chances / options even further, I would prefer to use my redundancy in lieu of wages to pay my bills until I get another job.
Barney - 9-Feb-17 @ 3:01 PM
Lato - Your Question:
I have recently been made redundant on the 27th of this month I will receive £11.5k before tax. Am I entitled to any benefits or will my redundancy payment be classed as savings?Lato

Our Response:
Regardless of your savings, you may be entitled to claim Jobseekers Allowance if you have paid National Insurance for the past two years.
RedundancyExpert - 5-Jan-17 @ 2:49 PM
I have recently been made redundant on the 27th of this month I will receive £11.5k before tax. Am I entitled to any benefits or will my redundancy payment be classed as savings? Lato
Lato - 5-Jan-17 @ 1:04 AM
I'm being made redundant in march2017 will.I have to.pay back all the tax credits I have received for 2016 -2017 ? The redundancy is over 30k thanks
Caz - 28-Nov-16 @ 8:40 PM
I'm due to be made redundant within the tax year 2016 to 2017 I claim tax credits at the moment whilst working 39 hours. Will I have to pay back the last 12 months tax credits with my redundancy as it will be over 36k
Caz - 28-Nov-16 @ 8:34 PM
I'm due to receive redundancy payment of £75k and understand the £30k tax free allowance however I am drawing my pension already (took lump sum last year) and wonder if I can put any of my redundancy back into the pension to avoid hefty tax on the remaining £45k. Is that a possibility? Any other ideas? I am also about to set up a business as a sole trader and wonder if I ought to leave this until the next tax year?
liv - 24-Nov-16 @ 9:19 AM
Can I invest the entire excess of a redundancy settlement+notice period+holidays (£23 excess) directly into my company pension to reduce the tax/NI burden ? thanks
WaMo - 23-Nov-16 @ 12:38 AM
Redundant - Your Question:
Hi,My role will cease to exist 31/01/17.What am I entitled to and can I ask for extras such as loss of pension etc and I will be 55 3 weeks after the mentioned date.

Our Response:
You have not said whether you will be awarded a redundancy payment. However, once you leave work you should be entitled to Jobseekers Allowance if you have paid National Insurance contributions for two years or more and are considering looking for work. You can see more via the Entitled To link, here.
RedundancyExpert - 6-Oct-16 @ 2:40 PM
Hi, My role will cease to exist 31/01/17. What am I entitled to and can I ask for extras such as loss of pension etc and I will be 55 3 weeks after the mentioned date.
Redundant - 6-Oct-16 @ 9:17 AM
I am being made redundant after 16 years at tesco, I will be getting around 12,000. me and my partner with 4 children live in a council property. I get child Tax credit, she also works 25 hrs a week. When I get the redundancy pay will I still get these benefits and can I also claim for other benefits e.g. housing/council tax until I find work or do I have to use this money to pay for the rent and council tax. The reason I'm asking this is that I have other creditors that I would like to clear and it won't leave a lot left.
THEONE - 11-Sep-16 @ 6:22 PM
suppose my employer is not offering us the ability to put our redundancy monies into our company pension. This means the money will come to us post tax. What is the simplest way, with minimum handling fees, to take out a new second pension to put this one and only taxed redundancy monies into, to then later take it out as some sort of pension drawdown. Particularly how does one then go about getting back the tax paid on that money? It would be simplest if the tax was automatically reclaimed and added to the pension pot I opened ? Thanks very much ?
TH - 8-Jun-16 @ 4:55 PM
Hello, I will be receiving a redundancy payment of £77 k in Aprilthis year. I know the first £30 k is tax free but was wonderig what is the best way to avoid paying tax on the rest? I need about £17 k to pay off some debts. Hope you can help and thanks.
Pat262 - 26-Mar-16 @ 11:02 AM
I was temporary laid off from work in October without pay and in January was made redundant as the company is now insolvent. I am being paid statutory redundancy through the gov and I am also being paid my statutory notice. Since laid off Ive been claiming housing benefits and jsa but for the last 5 weeks I have been getting ESA as I'm not fit for work arm. I would like to know how this will effect my redundancy and notice pay.. Will I loose the right to claim housing Benefit? Will I have to pay anything back to them? And also Will all money that I've received from esa be taken out of my notice payment?... Really need to know what's happening as I have got myself in a little debt whilst being off work for so long and was hoping my redundancy and notice could cover the debt.
Staceyg - 3-Mar-16 @ 6:53 PM
I've been made redundant after 3 years with a total of £500 redundancy pay. I worked part time. I get working tax credits child tax credits and housing/council tax benefits. My last day was today. Who do I inform first. I'm in a right pickle!
Dolly - 23-Jan-16 @ 2:21 AM
Hi I am being made redundant after 18 years and am receiving almost £52k redundancy Plus a number of share perks will also be released (one of which I will pay tax and Ni on). In addition to this I have the possibility of starting a new role directly after I finish at the end of the year. Which with the redundancy would mean I receive an annual taxable amount of £120k this year (no idea where it all goes) .I am concerned that this will have a massive negative impact on my tax allowance for next year.. would the best option to place all of the amount over the (£30k) tax free limit from my redundancy into my pension pot thus keeping me just under what appear to be the £100k trigger point? Whilst I appreciate this is a lot of money in comparison to many, I would still rather not give HMRC more than I have to, if I can leveraged my Pension.
Hobbit - 24-Nov-15 @ 4:05 PM
jimmy - Your Question:
I am just about to be made redundant after 11 years service and my package is 19 thousand although 6 thousand of that is taxable would I eligible for dole?

Our Response:
You would be eligible to apply for Jobseekers Allowance, please see link here.
RedundancyExpert - 11-Nov-15 @ 11:48 AM
i am just about to be made redundant after 11 years service and my package is 19 thousand although 6 thousand of that is taxable would i eligible for dole?
jimmy - 10-Nov-15 @ 9:44 AM
Margie - Your Question:
I am a pensioner but carried on working.The organisation that I work for has been over the last few years made a number of redundancies. Recently the staff of the organisation were called in to attend a meeting where further redundancies were outlined. It has now reached the point where voluntary redundancies have been called for. I would like to know will taking the redundancy affect my claiming housing and council tax benefits and also if I am entitled to claim for any other benefits.

Our Response:
Please see article How your Redundancy Package can Affect your Benefits, link here. I hope this helps.
RedundancyExpert - 2-Sep-15 @ 1:06 PM
I am a pensioner but carried on working. The organisation that I work for has been over the last few years made a number of redundancies. Recently the staff of the organisation were called in to attend a meeting where further redundancies were outlined. It has now reached the point where voluntary redundancies have been called for. I would like to know will taking the redundancy affect my claiming housing and council tax benefits and also if I am entitled to claim for any other benefits.
Margie - 1-Sep-15 @ 7:50 PM
PRESLEY - Your Question:
I am 57 years old and I am leaving work shorlty after 30 years service under the company's Voluntary Exit Scheme.Can I apply for Contributions based JSA while looking for a part-time job

Our Response:
You should be eligible. Please see link here on how to claim.
RedundancyExpert - 13-Aug-15 @ 2:39 PM
I am 57 years old and I am leaving work shorlty after 30 years service under the company's Voluntary Exit Scheme. Can I apply for Contributions based JSA while looking for a part-time job
PRESLEY - 11-Aug-15 @ 4:27 PM
Getting made redundant my expected pay out is 55 before tax . I know the first 30 thousand is tax free . Would I benifit putting 20 thousand into my final pension scheme . How more a year would it give me at 55 . I believe my pensions is 21000 but will be reduced to about 11000 if I take my pension early.
Shazza - 2-Apr-15 @ 8:32 PM
@paolo - I'm afraid we can't really give personal advice on what you should do with your money apart from what is recommended in the article. I suggest you see a regulated financial advisor who will be able to look into your finances more fully.
RedundancyExpert - 9-Mar-15 @ 10:04 AM
Hi. I will be getting a severance payment of about £70k at the end of the month. I left my company pension scheme 18 months ago and have been getting both my salary and pension. I am 63.I will be paying 40% tax on my severance over £30k which is a lot to lose. But if I put say up to this years pension allowance into a new sipp then I will get the 40% tax paid back and then I can take 25% tax free and then draw the rest down at lower tax rate. Is this correct? Also can I use last years pension allowance to increase my sipp pot? Paolo
paolo - 5-Mar-15 @ 3:28 PM
@Martin - Yes, you can generally put up to £40,000, per year into your pension, so it is an option. It means you don’t pay any tax until you draw your pension, which for most people that will be at basic rate.
Rob - 9-Dec-14 @ 11:22 AM
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