If redundancy strikes, don't panic. Follow these seven steps to help cushion the blow.
With 2.26 million* currently unemployed, and fears this number could rise to 3 million over the next year, redundancy is becoming a bigger and bigger threat.
But remember, redundancy isn't the end of the world (although it may feel that way at the time). In fact, it can even be the start a new beginning. But there's no doubt, whatever your circumstances, your income has just taken a big hit.
So, here are seven things you should do to make sure your finances weather the redundancy storm:
1. Find out how much redundancy pay you'll get
The first step is to check your contract of employment to figure out how much redundancy pay you're entitled to. If you've been employed by your company for at least two years, you'll get statutory redundancy pay as a minimum. Remember redundancy pay of less than £30,000 is tax-free.
How much statutory redundancy pay will you get?
This depends on your age, how long you've worked for the company, and your weekly pay (up to a maximum of £350 per week). This is how it breaks down:
- If you're under 22, you'll get half a week's pay for each full year of service.
- If you're over 22 and under 41, you'll get one week's pay for each full year of service.
- If you're 41 or over, you'll get one and a half week's pay for each full year of service.
Your employer may be willing to pay you more than the legal minimum. In this case, it's a good idea to negotiate your redundancy package. If you belong to union, you could ask them to negotiate on your behalf. Make sure you get the details of your redundancy package in writing.
2. Check your protection policies
At lovemoney.com, we would never recommend you buy an overpriced insurance policy such as payment protection insurance (PPI), but if you already have one, we definitely recommend you try to claim on it.
PPI is designed to cover repayments on loans, credit cards or a mortgage if you're unable to pay them yourself following sickness, accident or unemployment. If your claim is successful, your payments will normally be cover for 12 months, giving you time to find a new job.
That said, PPI companies have a very bad reputation for rejecting claims... but don't let that deter you.
3. Claim benefits
While you're out of work, you should be entitled to contributions-based Jobseeker's Allowance (JSA). You'll get a weekly rate of £64.30 (or £50.95 if you're aged 16 to 24). This will not be means-tested for six months, as long as you have made Class 1 National Insurance Contributions during your employment (ie. you weren't self-employed).
If you don't qualify for contributions-based JSA, you may be eligible for income-based JSA. But if you have savings of more than £6,000 (including your redundancy pay) your JSA might be reduced. And, if you have savings of more than £16,000, you're unlikely to qualify.
Depending on your circumstances, you may also be able to claim other benefits such as Council Tax Benefit or Housing Benefit (or Local Housing Allowance if you rent a property or room from a private landlord).
4. Review your financial position and draw up a budget
It's very important to get a clear picture of your finances now. You'll need to work out how much you've got in savings as an emergency cash cushion, alongside your redundancy pay and other assets.
You'll also need to draw up a budget of essential expenditure such as your mortgage, other debts, energy bills (you could save money by switching to a cheaper energy tariff too), council tax and food bills.
Read How to budget in five simple steps for some easy tips on how to get started. It goes without saying (although I'll say it anyway!) that you'll have to cut out all luxury and unnecessary spending.
Don't panic if your outgoings look like they'll exceed your savings/redundancy pay soon. Remember, this financial situation is only temporary. By budgeting now you'll give yourself the best chance of keeping your head above water until you get a new job.
5. Take control of your mortgage
The Financial Services Authority (FSA) is putting pressure on lenders to treat borrowers fairly who are in arrears. If you think you might struggle, speak to your lender before you fall behind. Your lender may agree to a temporary payment holiday, or allow you to switch to an interest-only loan for a time.
The government has also recently launched the Homeowners Mortgage Support (HMS) Scheme, specifically designed to help borrowers who have lost their jobs. Under the scheme, you may be able to delay some of your interest payments for up to two years. Read Help for struggling homeowners to find out more.
6. Take control of your pension
If you have a work pension, don't forget about it once you stop working for your company. Affordability may be tricky, but it's a good idea to keep up your contributions. If you receive a generous redundancy payout, you could think about topping up your pension pot with a lump sum.
You can leave the pension where it is, although you may prefer to transfer it somewhere new, possibly to an individual scheme with lower charges. You could even think about moving it into a self-invested personal pension (SIPP), where you'll have far more control.
7. Don't forget about protection
You may have had protection policies such as life insurance, private medical insurance or critical illness cover as part of your employment contract. Of course, when redundancy hits, you'll lose these benefits.
Companies often pay reduced premiums for a group policy, but it may be possible to transfer the protection to you individually on the same favourable terms. If you can't do that, think about setting up a new policy so there isn't a gap in your cover. You can cancel the policy later if you get similar benefits in your new job.
Also remember to include the value of these lost benefits when you negotiate your redundancy package.
On a final note, redundancy can be complicated. If you need help understanding your rights, get in touch with Citizen's Advice at www.citizensadvice.org.uk.
*According to figures from the Office for National Statistics.
More: The brighter side to redundancy? | Avoid rip-off redundancy insurance