Losing a job is a major life event. Good redundancy preparation is the bedrock to managing it in the futureFrank Conway – Founder of MoneyWhizz
The job market in Ireland is experiencing one of the most uncertain periods in our nation’s history as a result of the onset of Covid-19.
As such, employers have to make difficult decisions on how many people they continue to employ. And while the concept of a ‘job for life’ has been eroding for many years, the rate of employment uncertainty has accelerated significantly.
WHAT IS REDUNDANCY?
Redundancy is part and parcel of business where those that are impacted by falling cash-flow and changing consumer demands must adapt in order to survive.
Since the onset of Covid-19, there have been many companies that have announced very significant redundancies across a diverse range of industries.
Voluntary redundancy occurs when a company needs to trim the workforce and asks certain employees to volunteer for redundancy in exchange for better financial terms than they would receive under a forced redundancy.
‘Collective redundancy’ occurs when a group of employees is let go in a 30-day period.
Redundancy preparation considerations
Factoring for loss of benefits – many employers offer their employees varying amounts of benefits, including
- Death-in-service benefit – which may equate to 4-times their salary. Where someone loses employment as a result of redundancy, they need to factor this into their financial preparations and make any necessary adjustments.
- Private pension – occupational pension schemes where there are varying amounts of payments made into a pension fund in the employees name will cease on redundancy. This means that aside from any investment growth, the pension fund will not receive any further contributions. Employees should expect to be presented with a range of options in respect to the future management of any funds accumulated in their workplace pension, those include leaving it under the administration of the existing arrangement, transferring it to a new employer (if they have a provision in place) or transferring it to a buy-out bond or PRSA.
- Paid or subsidised health insurance – loss of this benefit means those affected will need to make alternative arrangements to keep cover in place to protect themselves and their families.
Loss of status – for some, the loss of employment may also impact on their identity. Gone are the perks of having a job, a title, a position among peers and income that may have supported a particular lifestyle. That is not to say those facing redundancy will not find new employment. However, for some, it may mean changes to a way of life they may have had for many year or decades.
Loss of routine – this is a major factor for many people. However, since the onset of Covid-19 in early 2020, there is scarcely a worker in Ireland that has not experienced routine disruption. However, as redundancy causes a more permanent shift in day-to-day routine, it has a much larger impact.
Loss of regular income – despite the provision of various redundancy payment arrangements (statutory, ex-gratia etc and explained in greater detail below), the loss of a regular income can have a profound impact on personal and financial wellbeing. This is why it is so important those that are facing redundancy set the time aside to examine their household income and expenditure, set out a household budget and take the necessary steps to keep their finances in order.
TWO TYPES OF REDUNDANCY PAYMENTS
What is Statutory Redundancy?
This is a lump sum payment which is based on your pay. Eligible staff members receive two weeks’ pay for every year of service (over the age of 16) along with an additional week’s pay. If you have been working for the company for four years, you should receive five weeks’ salary. This payment has a maximum earnings limit of €600 per week.
Incidentally, the weekly amount you receive is based on your typical weekly salary including benefits-in-kind and average regular overtime; before PRSI and tax deductions. In other words, you receive statutory redundancy payments based on your gross pay.
What are Ex-Gratia Payments?
Legally, your employer only needs to pay you the statutory redundancy payment if you are made redundant. However, some employers also offer an ex-gratia payment which is another way of saying payments above the legal minimum.
WHICH EMPLOYEES ARE COVERED?
You are eligible for a statutory redundancy payment if you meet the following criteria:
- Aged 16+
- Be in employment insurable according to the Social Welfare Acts. If you are aged 65 or less, you must also be paying Class A PRSI.
- You need to have worked continuously for the same employer for a minimum of two years over the age of 16.
- You must be made redundant.
The statutory redundancy payment is tax-free.
What to do with a lump sum redundancy payment
A major consideration for those that go through the redundancy process and end up with a significant lump sum payment, the question of what to do with or how to manage it arises.
No thanks! For starters, an increasing number of financial institutions are discouraging large deposits into savings or regular deposit accounts. For example, some banks may pay little or nothing by way of interest on monies held on deposit. Alternatively, credit unions are actively discouraging members from holding significant funds on deposit. In fact, this development has recently meant some credit unions across Ireland sending funds back to members where they exceed share thresholds.
Factor for inflation
One consideration that can often be omitted from financial planning is the impact inflation can have on the future value of money. For those that may receive a significant redundancy payment, simply leaving it on deposit while earning little or no interest (it may even be subject to a negative interest charge in some cases) , inflation, even small amounts of it will reduce the future purchasing power of that money.
Investing is one option
One way of reducing the impact inflation will have on the purchasing power of money is by investing it. And no, this is not Wolf of Wall Street stuff that is equity-heavy. Investing could include some low-risk bonds or funds highly weighted in bonds that simply exceed the prevailing rate of inflation to simply maintain the purchasing power of that money.
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There is no escaping the fact that redundancy represents a major life event regardless of whether it comes about as a result of a voluntary or involuntary process. From a personal financial perspective, it is important to factor the loss of any employer benefits into the future household budget if retaining those benefits is to happen. From a general wellbeing perspective, it is important to consider how one plans to use their time and fill any potential of loss of social status as a result. Finally, when it comes to some major decisions, like investing or starting a business, make sure to conduct thorough research and seek out professional advice first.
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Frank Conway is the founder of MoneyWhizz and a Qualified Financial Adviser.