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Life after redundancy

I am concerned about redundancy and the implications to my wider finances. What issues should I be aware of?

There is an abundance of information on the internet about the redundancy process, what constitutes unfair dismissal and so on, so I do not propose to cover all of that here. If you do need any information, look at www.acas.org.uk or www.citizensadvice.org.uk. There is also a good redundancy calculator at www.directgov.co.uk.

You need to bear in mind that if you were entitled to benefits such as life insurance, you will lose these. You will normally keep your entitlement to your pension, although the benefits provided may change substantially.

If you are lucky enough to have a final-salary pension, you should be sent a statement showing your deferred annual pension. You can also request a transfer value and then compare whether it would make sense to transfer this. Don’t take the decision lightly though.

If you have a group stakeholder or personal pension scheme, you should be able to carry on paying in to this and it can often represent an excellent place to direct future contributions, particularly if it was set up on a nil-commission basis. If it was an occupational money-purchase pension, you will not be able to continue contributing to it but, again, the charges could be very low.

Do not automatically assume that just because you have left the employer, you should transfer, as there are often many compelling reasons not to. However, if fund choice was poor and charges were not particularly advantageous, consolidation can tidy up your finances and give you a much clearer view of your overall investment strategy.

You may be given the opportunity to draw on your pension early through early retirement. Don’t just assume that this is the right thing to do. Remember that if you are planning on seeking new employment, the income from the pension could end up all getting taxed at 40 per cent, whereas if you delay drawing on your pension until you have properly retired, you might be able to obtain a higher level of income, taxed at a lower rate.

With life insurance, it is commonplace for employers to provide staff with at least four times salary death in service life insurance cover. Where firms offer generous pension schemes, the death benefits on these are often much more generous and therefore the loss of these should not be underestimated.

When analysing what level of life insurance you need, it is extremely important to look at what income would be lost in the event of death and how your expenditure could change if it needed to. Add in some sensible assumptions for things such as cost of living inflation and you have a much more logical approach to the question of how much life insurance you need than the traditional multiple of salary basis.

If you lose your job, you will lose insurance cover through work and consideration needs to be given as to whether this needs to be replaced. The need for cover does not just disappear. It makes sense to wait to see what any new employer will offer you but it is important to replace the lost cover as soon as is practical.

Employer-sponsored life insurance is a very worthwhile benefit but it should not generally be relied upon as your only cover. What if you are in poor health when you leave the company and cannot get a replacement policy?

Other insurance that could be lost on redundancy would include the likes of critical- illness cover and income protection and a similar review should be undertaken on these too.

If you have a share option scheme such as a save as you earn scheme, check what your options are. Different schemes have different rules. For example, with SAYE, scheme options exercised within six months of the cessation of employ- ment through redundancy are not taxable regardless of the time period between the grant and exercise of the option.

Finally, a period of unemployment may lead to cashflow problems. This is why it is always advisable to keep a sensible cash float to cover unexpected events like this. The last thing you really want to be doing is being forced to cash in long-term investments such as stocks and shares Isas to tide you over when the value of these investments is currently likely to be depressed.

If you have a mortgage, ask your lender if it would be possible to take a payment holiday or perhaps make a temporary switch to an interest only basis. Take the opportunity to review your expenditure and see what areas of non-essential spending can be trimmed down.

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