If you are an employee who has been offered a voluntary redundancy, it is vitally important that you understand all of the options available to you and the consequences of the decisions that you make.
Voluntary redundancies are different for every individual. We have worked with many companies and their staff in these scenarios, and we have yet to come across the same situation twice. However, the question that is always asked (and should always be asked) by the employee is – is this right for me?
In all voluntary redundancy situations, personal circumstances need to be considered to decide whether taking the redundancy is right for them or not. This is different in almost every single case we have dealt with. There are a few things to consider in relation to before you leave and just after you leave your job.
Before you leave
Your redundancy calculations may include what is known as an increased exemption of around €10,000. You need to know what your pension is worth and make sure you know the future impact if you accept an increased exemption from your employer.
Accepting an increased exemption will waive the future entitlement for you to receive a tax-free lump sum. This tax-free lump sum would be about 25% of your pension fund at retirement.
Proceed with caution on this as we have had clients that received inappropriate advice leading them to accept an increased exemption when only a few years later the amount they could have received as a tax-free lump sum exceeded the short-term gain when being made redundant. This pension fund was worth over €500,000 so they would have received a lump sum of €115,000 – they accepted €10,000 on redundancy forgoing the €115,000 in retirement.
After you leave
Once you do take your redundancy, it is important that you use that money wisely and make smart financial decisions. Of course, go spend some of it on the holiday of a lifetime or whatever it is you want to do, but be sure to use the rest of the money intelligently.
A lot of people will try to clear as much of their mortgage as possible right away. While this is understandable, it is not always the best use of your money. For example, if you received a redundancy payment of €60,000, you could use it to pay down your mortgage which is probably costing you less than 3% interest each year. Or you could invest it, where you could expect to get between 4% and 6% each year if done right.
If you choose to pay down your mortgage, you are not reducing the monthly repayment amount in most cases. You are just cutting the term of the mortgage. The burden of paying your mortgage is understandable, but once it’s done you may have used all your money. What happens if you are unable to work at some point in the future? By keeping the money invested, you’re giving yourself the opportunity to have money built up for that rainy day. If paying off your mortgage is your highest priority, by all means, go for it. Just understand that there are better options for you.
If you are facing a voluntary redundancy situation and need financial advice, call us on 025-30588 or book a complimentary chat here.