How Much Redundancy Pay Would You Get?

Cliff D'Arcy
by Lovemoney Staff Cliff D'Arcy on 11 July 2008  |  Comments 8 comments

As the economy weakens and unemployment rises, it's worth working out how much you'd get if your job were axed.

If you were suddenly to lose your job, how quickly would your household budget start to buckle under the strain? Armed with a suitable cash cushion (in the form of an emergency fund, nest egg or rainy-day money), you can fall back on your savings. That's why I recommend keeping between three and twelve months of living expenses in a high-interest, easy-access savings account.

On the other hand, more than half (52%) of British adults could survive financially for just seventeen days following an unexpected loss of income, according to research from Combined Insurance. So, what happens if you find yourself out of work for an extended period without any savings to rely on, or if your savings run out before you return to work?

What is redundancy?

Redundancy happens when you are dismissed from your employment because your job no longer exists. This may happen when a company reduces staffing levels in order to cut costs. Also, it may happen when a business closes down or relocates. The upshot is that there no longer a position for you, so it's off to the Jobcentre to claim your Jobseeker's Allowance and any other State benefits to which you may be entitled.

If you are made redundant, then you are entitled to work out your notice period, go on `gardening leave' or receive pay in lieu of notice, alias PILON. So, first check your written contract of employment to find out your contractual notice period when your employment is terminated.

In addition, you are entitled to redundancy pay if you have worked for your employer for at least two complete years. Usually, employers have a redundancy policy which sets out your entitlement to redundancy pay. Often, this will be higher than the legal minimum (for example, two weeks for every complete year of service).

The first £30,000 of your redundancy payment is tax-free, which is an added bonus. However, many companies, particularly small firms, only pay statutory redundancy pay. As you'd expect, this is far from generous. What's more, it depends on your length of service, your age and your weekly pay (up to a limit of £330).

Statutory redundancy pay (applies since October 2006)

Your minimum entitlement on being made redundant is:

         half a week's pay for each complete year of service below the age of 22;

         one week's pay for each year between 22 and 40; and

         1½ weeks' pay for each year above the age of 41.

However, remember that this payout is capped at £330 per week, which may be substantially less than your actual before-tax wage. To save crunching the numbers yourself, you can use this redundancy ready reckoner, courtesy of the Department for Business, Enterprise and Regulatory Reform.

To show you how big the gap can be between statutory redundancy pay and more generous company redundancy pay, here's a worked example, using my wife as a Guinea pig. Mrs D'Arcy has been working for the same firm since graduating in the late Eighties, amassing eighteen complete years of service.

Her employer (a multi-national Goliath) generously pays her 3½ weeks' full pay for each of the first fifteen years, and 4½ weeks' full pay for each year thereafter. The minimum payout is twelve weeks or £10,000, whichever is larger, and the maximum payout is 104 weeks. Thus, if she were to lose her job after eighteen years, my spouse would receive (3.5 x 15) + (4.5 x 3) = 66 weeks' full pay, the first £30,000 of which would be tax free. That should be enough to pay her way for perhaps two years.

Now let's look Mrs D's statutory redundancy pay. For example, let's assume that her company went bust and was unable to pay out the higher benefits in set out her contract. In this scenario, the government would step in by paying her statutory redundancy pay. For eighteen years of service below the age of 40, she would receive statutory redundancy pay of 18 x £330 = £5,940. For the record, that's roughly a tenth of what she'd get if her company were solvent. This shows the value of a generous redundancy policy.

So, even if your job is safe and secure, it's worth checking to see what might be on offer if the worst came to the worst. Also, if you do find yourself in the firing line for redundancy, try haggling for higher exit pay and benefits. For example, I once managed to convince an ex-employer to triple my exit package to eighteen months' pay. That was one of my better days!

More: Find superior savings accounts via the Fool | How Much Is Your Wage Really Worth? | What If You Lost Your Job Tomorrow?

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Comments (8)

  • victim1940
    Love rating 0
    victim1940 said

    I took out redundancy protection on the advice of my bank manager. I was subsequently made redundant and found I had to be redundant 6 months before I could claim. I started a business on my own account so could not claim. I then found that the monthly payments for the cover were for a loan to buy the cover and therfore I could not stop paying. I then found the bank manager was acting on her own account and I could not even have a go at the bank. I know I should have read all the small print but life is too short.

    Report on 14 July 2008  |  Love thisLove  0 loves
  • rowlystravel
    Love rating 27
    rowlystravel said

    IPI is what uyou need, but you cant get a lump sum benefit, the idea of insurance is that it does not make it beneficial NOT to work. Which is exactly what a lump sum would do... so stop looking as it is not going to get you anywhere..sorry matey

    Report on 04 September 2008  |  Love thisLove  0 loves

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