With redundancies rising at record levels recently, and the prospect of further bad news to come, we’ve had a lot of enquiries from people who are facing redundancy and want to see if they can take the opportunity to retire from work.
For those who have worked for their current employer for a long time, entering the job market again in their fifties or sixties is not a very appealing prospect.
We’re working with these clients to understand whether their finances are retirement ready, and what they need to do if they’re not.
Redundancy payment
If you have worked at your current company for a long time, you should get at least the statutory level of redundancy payment when you leave.
You will normally be entitled to statutory redundancy pay if you’re an employee and you’ve been working for your current employer for 2 years or more.
The current level of statutory redundancy pay is:
· half a week’s pay for each full year you were under age 22
· one week’s pay for each full year you were age 22 or older, but under age 41
· one and half week’s pay for each full year you were age 41 or older
You need to be aware that length of service is capped at 20 years, and your weekly pay is the average you earned per week over the 12 weeks before the day you got your redundancy notice.
The first £30,000 of redundancy pay is tax-free, and this can be a real benefit to those being made redundant, especially if they plan on retiring.
Anything over £30,000 will be taxed as earned income in the year you receive it (so this means it will be added to all your other income and taxed accordingly).
Your employer can choose to pay you more than the statutory level of redundancy pay if they wish, or if your contract entitles you to more than the statutory amount.
For our clients who have received a substantial redundancy payment, we’ve often seen that this can be the difference between whether they can afford to retire or not. The redundancy pay can be used to pay off their mortgage, boost their savings, or simply be used to cover their outgoings until their state pension or personal pensions start in the future.
Whether this works for you will depend on your own financial and personal situation. I would recommend anyone who is facing redundancy, and wants to use it as a catalyst for retirement, seeks independent financial advice about the options available to them.
Personal Pensions
You can access your personal pensions from age 55 onwards (rising to age 57 in 2028). Once you’re made redundant, contributions to your workplace pension will cease, although you may be able to continue making personal contributions by contacting the pension provider.
Depending on the level of pension you have built up, and your level of outgoings, it may be possible to retire by starting to draw an income from your pension plans.
There are a number of options available in respect of how you turn a personal pension plan in to an income, including buying an annuity and income drawdown. For more information check out our article ‘Annuity vs Drawdown?’.
When buying an annuity, the younger you are when you buy it, the less income you are likely to receive, because the annuity provider will have to pay out for longer. With income drawdown you can now draw as much out as you like each month (or year), but you need to be really careful that they amount you are drawing is sustainable, to ensure you don’t run the pot dry. The earlier you start to draw an income, the higher the chance of depleting your pension pot.
Again, independent financial advice is crucial to make sure you’re making the right decisions.
Final Salary Pensions
Unlike personal pensions, the age at which you can draw on final salary pensions is set by the scheme’s trustees and will vary from scheme to scheme.
Sometimes you can draw on final salary pensions earlier than the scheme retirement age, but there are usually penalties for doing so, in the form of ‘early retirement reductions’. These are usually a percentage of the full income available at retirement date.
For example, if your final salary pension scheme has a retirement age of 65, and the early retirement factor is 5% for every year you retire early, then if you start drawing your income at 64 then the pension you receive will be 5% lower than it would have been at 65, 10% lower at age 63 and so on.
While these amounts may seem small, it will affect you for the rest of your life, because all future income will be reduced by the same amount. The effects are particularly noticeable if you draw many years early and can add up to a huge amount of lost income over your lifetime.
State Pension
The state pension age is now 66 (2020/21), and it is not possible to elect for this to be paid earlier.
The full state pension is £9,109 for 2020/21, and for many retirees it forms an essential part of their retirement planning.
If you retire earlier than the state pension age, you will need to use your pensions, savings, investments and other assets to provide all of your income until the state pension starts.
The earlier you retire, the longer you’ll have to make up this shortfall, so it’s important to understand how you will use these assets to cover the time between now and age 66.
Savings and investments
If you’ve got savings and investments, you may be able to use the income from these to meet your outgoings.
With cash interest rates at all-time lows, it’s unlikely that your savings will generate enough interest to live on, unless you have very substantial amounts saved up.
If you have investments, then you may be able to use the dividends from these to cover your cost of living, or alternatively if these are held on an investment platform you may be able to withdraw a set amount each month by way of a partial encashment.
Similar to income drawdown pension withdrawals, you need to make sure that the amount you withdraw is sustainable over the long-term, otherwise you risk depleting your capital over time.
Rental income
If you own rental properties, the rental income you receive may be a big help in covering your monthly outgoings.
Now might be the time to review your mortgage deal and the amount of rent you charge, to maximise the income you receive.
In the right circumstances a combination of two or more of these elements may mean that early retirement is a realistic prospect after you’re made redundant. Whether this is right for you will depend on your own situation and the level of assets you have built up, and your income and outgoings.
Risk Warnings
· Income from pensions is taxed at standard income tax rates and bands.
· The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
· Levels, bases of and reliefs from taxation along with the tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future. A pension is a long-term investment not normally accessible until 55 (rising to 57 from April 2028)