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The number of workers losing their jobs in the UK has hit record levels amid the economic havoc caused by the coronavirus pandemic.

A record 370,000 people were made redundant — or took voluntary redundancy — in the three months to October 2020, according to the Office for National Statistics.

With the job toll expected to continue rising, FT Money explains what you need to consider if offered redundancy, including how your pension will be affected.

I’m being made redundant. What am I entitled to?
You’ll normally be entitled to statutory redundancy pay if you’re an employee (in other words, not self-employed) and you’ve been working for your current employer for two years or more.

If you are eligible for redundancy, you will be entitled to a lump sum under these terms:

  • Half a week’s pay for each full year you were under 22

  • One week’s pay for each full year you were 22 or older, but under 41

  • One and a half week’s pay for each full year you were 41 or older

  • Length of service is capped at 20 years.

Martin Jenkins, a partner at Irwin Mitchell, an employment law firm, says a proposed redundancy payment is compensation for loss of position, but also usually covers payments in lieu of notice, or when you leave your job ahead of the normal notice period.

If redundancy is proposed, he advises employees to look carefully at the package offered, even if the “natural focus” is to take the package offered and start finding a new job.

“What may at first glance look like a reasonably attractive lump sum needs to be unpacked to see what is included. An employer must consult and the sum you have been offered is a proposal. You can and should ask questions including what value is being offered for lost pension contributions,” he says.

Do I have to work my notice period?
David Greenhalgh, employment lawyer at Excello Law, says an employer giving notice to terminate can either ask an employee to work their notice or, if the employment contract wording allows, put them on garden leave (where they are excluded from work or having client contact) or pay them in lieu of notice (a lump-sum payment is made instead of the employee working notice).

“What has to be included in a payment in lieu of notice depends on what the employment contract says,” says Mr Greenhalgh.

“Most recently drafted employment contracts will allow the employer to pay in lieu of notice in relation to salary only — which will mean there is no obligation on the employer to pay the pension contributions which it would otherwise have paid into the pension had the employee worked their notice.”

Can I ask for the redundancy payment to be made into my pension?
Experts say it can be tax efficient to have a redundancy payout paid into a pension scheme instead of handed over as cash. Up to £30,000 of a payment for loss of a job can be tax-free. However, amounts above that will normally be subject to a tax charge.

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“The advantage of this option is the lump sum payment into the pension will be tax free, whereas it would attract income tax if paid outside the pension,” said Jeremy Harris, a partner at law firm Fieldfisher.

“There would be no tax benefit for the employee in doing so, however, if the annual allowance (usually £40,000) is exceeded.” 

Mr Harris said an employee cannot insist on an employer making a pension contribution in lieu of a cash lump sum entitlement, in the absence of a contractual agreement giving the employee this right. Once paid into a pension, any redundancy payout will be tied up until the individual is at least 55.

What happens to my workplace pension when I am made redundant?
If you are made redundant your employer will no longer contribute to your workplace pension. Depending on your circumstances, you may be able to keep the pension where it is, transfer it to a new employer’s retirement plan or a personal pension. You may also be able to take early retirement. Your state pension and any existing pensions won’t be affected.

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