Receiving a redundancy lump sum payment (severance pay) may help soften the blow of redundancy, but deciding what to do with your lump sum can be a bit of a minefield.
The first £30,000 of your redundancy lump sum will be payable tax free, any excess is taxable at your marginal rate of income tax. However, with careful planning and investment your tax liability can be minimised;
1. Boost your retirement provision by making additional pension contributions, either personally, or by requesting your employer contribute the taxable element of your severance pay to your pension. You can receive tax relief on pension contributions within certain parameters. For example a £10,000 contribution receives basic rate tax relief of £2,500. This means that £12,500 is credited to your pension fund for an initial outlay of £10,000. A higher rate tax payer would receive a further £2,500 via their self-assessment.
2. Invest in other ways. There are a number of different investment options that allow you to utilise your allowances and exemptions, including Investment ISAs, Unit Trusts and OEICs, VCTs and EIS.
3. Reduce your debts. Interest payable on debts/credit cards/store cards etc is usually much more than the interest that is earned on savings.
4. Deposit in an interest baring savings account whilst you consider your options. For basic rate taxpayers up to £1,000 of interest from savings is paid gross (2016/17). This is reduced to £500 for higher rate taxpayers.
By discussing your situation with a Chartered Financial Planner at Springfield Financial Services, we can provide advice to help you to decide the best course of action.
If you’re being made redundant and will be receiving a severance lump sum, call us on 01772 729742.