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.
Before you start planning how to invest your redundancy payment, you need to know exactly what you're entitled to receive using our free Redundancy Pay Calculator.
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.
Find out how much statutory redundancy pay you could be entitled to. Enter your details and get an estimate in less than a minute.
Try our Redundancy Pay Calculator free, here on this site →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.
Your situation may be slightly different. ask a question below ↓ and our editorial team will reply with our advice.
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 <#45#>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.
I am being made redundant on 12th June, with a redundancy payment £125k.
I understand that £30k is tax free. This means I will have to pay tax @ 40% on £95k (125-30)=£38k.
I am 50 yrs old and I cannot make a large tax free lump sum into my pension pot & take it subsequently. I will have to wait until
Age 55 to get the 25% lump sum payment.
Is there any other way I can minimise the tax to be paid. Please share with me. Regards
Thanks.
Lato
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.
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.
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 ?
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.
My last day was today. Who do I inform first. I'm in a right pickle!
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.
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