Being made redundant can be a huge challenge and advisers can a play a vital role in helping a clients adjust to their new circumstances.
While the economy has somewhat bounced back from the economic downturn caused by the Covid-19 crisis, many of the hardest hit sectors, including the food industry and retail, have announced redundancies.
Figures from the Office for National Statistics show redundancies reached a record high of 314,000 between July and September – up 181,000 from the previous quarter.
Advisers, however, can offer peace of mind to clients who have been made redundant, helping them to evaluate their pensions or negotiate any tax planning implications, says Ross Anders, a financial planner at Tilney.
“Cash flow modelling can identify any potential shortfalls for the client and help an adviser draw up a new plan if necessary,” he explains. “It is then about looking at tax planning and using pension contributions to reduce the tax bill if it is a large redundancy payout.
“Redundancy can be such a life changing event that it may be necessary to reassess the suitability of the underlying investments. The client may not be able to take the same level risk and may have to re-position their portfolio.”
Alex Shields, a financial planner at The Private Office, initially uses cash flow modelling software to help find out how the client will be affected by redundancy: “The starting point is the redundancy payment, then we look at their retirement in terms of expenditure, pensions and investments to see if their plans are realistic.
“We look to holistically understand their situation and get as much information about their circumstances as possible and then build their scenario in our cashflow modelling software. From there we start looking at tax planning, pensions and investments.”
When people are made redundant they are generally able to receive the first £30,000 tax free, with any payment above this subject to income tax.
Shields says that people who have been made redundant can avoid paying income tax on their redundancy payment if they have it paid into their pension.
“For basic rate taxpayers their redundancy payment will push them into higher rate. If they get it put into their pension, then they can get the high rate tax relief. When they draw the benefits they have got 25% tax free and the remainder at the basic rate,” he explains.
“For those that go over £100,000 of taxable income in the tax year, they can get the equivalent of 60% tax relief on the pension contributions. I just had a case where the client was able to boost his lump sum from his final salary scheme by doing that. Even if that is not available they can still do the payment themselves as personal contribution and get the tax relief that way.”
Dominic McLoughney, a financial planner at Becketts Financial Services, notes a client’s wider income tax position can also be affected depending on the size of the redundancy payment.
“Lots of clients are usually unsure about the tax implications of their redundancy. Clients with an income of over £50,000 will see their child benefit affected, while those who go over £60,000 will receive none, which can be painful,” he says.
He gives an example of a client earning £50,000 who moved into the 40% tax bracket and lost all of their child benefit payments when they received a £10,000 severance payment.
“The result was that, out of the £10,000 redundancy, the client was only going to receive £4,012 – an effective tax rate of nearly 60%.
“We advised the client to go back to her employer and request that the £10,000 excess above the £30,000 tax-free severance payment be made as a salary sacrifice contribution to her pension as well as asking for the employer national insurance saving to be passed on.
“Her company agreed to this due to the exceptional work that she had done – also it did not cause them any additional costs. Through our support the client received a £30,000 tax-free severance and a pension contribution of £11,380, increasing her estate value by £7,368.”
He says redundancy can also affect the personal allowance – the amount of income an individual can earn before they start to pay income tax.
“You lose £1 of personal allowance for every £2 of income over £100,000, so someone earning between £100,000 and £125,000 will end up paying 60% in tax.”
The coronavirus pandemic is also causing millions of Britons to reassess their retirement plans.
A recent study by Standard Life found that one in three over-55s would retire earlier than planned if they were made redundant during the Covid-19 crisis.
Worryingly, the research revealed that two-thirds of over-55s were not planning to seek financial advice regarding the impact of the pandemic on their pensions. However, for many retirement is not an option they can afford, with 45% of those just under the current state pension age saying they would have to look for another job.
Mathew Angell, director at Creative Lifestyle Planning, says: “There is this view that you retire at the state pension age but the pandemic has got people thinking about how they can retire early and enjoy life.
“One of our clients, who is 57, originally did not plan to retire until the state pension age but has now decided to retire next year.
“His redundancy was £142,000 and as a higher rate taxpayer we were able to carry forward his annual allowance for the last three years and get him his £30,000 pounds redundancy tax free, then the remainder went into his pension pot.”
Alistair McNeil, a financial adviser at Wren Sterling, believes it is important to help manage expectations for clients as their lives have often changed dramatically.
“Once the monthly income has stopped you have to look at the client’s wider circumstances,” he says. “Do they have another job to go to? Do they have a lump sum they can live off? What dates do they have to make repayments for things like mortgages?”
“We look at what investments the client has and ascertain whether it meets their current attitude towards risk given their new circumstances. Some people will be anxious to get things sorted very quickly, while others will be frightened to jump into anything.”
As a result of the pandemic, he adds, advisers need to be aware that clients who have been made redundant are more likely to be vulnerable: “Advisers need to be very careful with people who have recently been made redundant as they could be classed as been vulnerable. We need to reassure them and give them time to consider their options.”