Made redundant

First, the things with a deadline

Check the payment before you agree to it. Redundancy packages have several components taxed differently, and once the money has been paid the options narrow considerably.

Ask about paying some into your pension. This is the one with a real deadline, and it's covered below. It has to be arranged before the payment is made.

Find out exactly when your benefits end. Death in service cover, group income protection and private medical usually stop on your last day. If anyone depends on you, that's a gap opening immediately.

Everything else can wait a few weeks, and mostly should.

How the payment is taxed

Genuine redundancy pay is tax-free up to £30,000. That covers statutory redundancy pay and any additional compensation for loss of employment.

Anything above £30,000 is taxable as income, and it stacks on top of whatever you've already earned this tax year.

Pay in lieu of notice, holiday pay and bonuses are fully taxable regardless of the £30,000 figure. They're earnings, not compensation.

Two consequences worth working out before you sign anything.

A large taxable payment can push you into the higher or additional rate, or across £100,000 where the Personal Allowance tapers and the effective rate reaches 60%. See The 60% tax trap.

And if you're leaving partway through a tax year, your total income for the year may be much lower than usual, which changes what's efficient.

The pension move worth knowing about

Your employer can often pay part of your redundancy payment directly into your pension instead of to you.

Where they can, it avoids income tax and National Insurance entirely on that portion, rather than you receiving it taxed and contributing what's left. For someone with a payment above £30,000, this can be worth thousands.

Three conditions. It has to be arranged before the payment is made — afterwards is too late. It counts against your Annual Allowance, though carry forward may give you headroom. And it locks the money away until 55, rising to 57 in 2028, so it only makes sense for money you won't need.

Ask the question early. Employers vary in how willingly they accommodate it, and the answer is always no if you don't ask.

The pension decision not to rush

If you're over 55 and out of work, drawing on your pension is an obvious thought. Be careful with it.

Taking taxable income flexibly from a defined contribution pension permanently reduces your future contribution allowance from £60,000 to £10,000. If you return to work — and most people do — you've capped your ability to rebuild your pension for the rest of your career, over a decision made in a difficult month.

Taking only tax-free cash doesn't trigger it. Nor does taking a small pot of under £10,000 in full. See Which pot do you spend first?.

If you genuinely need income and there's no alternative, that's a real situation. Just make it a decision rather than a reflex.

Protection, immediately

The cover that ends with the job is the cover people forget they had.

Death in service typically ends on your last day. If you have a mortgage and dependants, replacing it matters — and personal life cover is generally cheap. See Life insurance.

Group income protection ends too, and it's harder and more expensive to replace individually.

Any protection you own personally continues unaffected. Check which is which before assuming you're uninsured.

Benefits and your National Insurance record

Claim what you're entitled to, and claim promptly.

New Style Jobseeker's Allowance is based on your National Insurance record rather than your savings, so redundancy pay doesn't disqualify you. It's paid for a limited period.

Universal Credit is means-tested, taking savings and a partner's income into account. A large redundancy payment may rule it out initially.

The reason to claim even a small amount: National Insurance credits. A gap year in your record can permanently reduce your State Pension, and claiming usually protects it. See Your State Pension.

If this is early retirement in disguise

For some people over 55, redundancy turns into stopping work altogether. If that's you, the whole of Retirement income becomes relevant — and there's a genuine opportunity in it.

The years between finishing work and your State Pension starting are the most tax-efficient window most people ever get, because your Personal Allowance is largely unused. Drawing pension income deliberately across those years, rather than living off savings and leaving the pension untouched, can be worth a substantial amount.

That's a plan worth making properly rather than drifting into.

What to do in the first month

Work out your essential monthly spending. Work out how long your savings and payment cover it. That number is your runway, and it converts a vague anxiety into a planning problem.

Then don't make any irreversible decision until you've had time to think. Consolidating pensions, cashing in investments, paying off the mortgage in full — none of these get worse for waiting six weeks, and all of them get worse for being decided in the first fortnight.

This page is for general education only and isn't personal advice. Redundancy settlements interact with tax, pensions and benefits in ways that depend on your circumstances, and the pension contribution route in particular is worth checking before you agree terms.