Once the redundancy package is agreed, an employee has to consider the tax and social welfare implications.
Statutory payments are exempt from taxation while special exemptions apply to sums over this amount. The basic exemption covers a lump sum of £8,000, plus £600 for each complete year of service on top of the statutory terms.
An increased exemption of £4,000 may be claimed where there has been no previous claim for this increased exemption and where no tax-free lump sum under an approved pension scheme is received.
But workers with many years of service or on higher wages may be better off claiming the standard capital superannuation benefit in preference to the basic or increased exemption. This is calculated by taking the individual's annual remuneration over the last 36 months of employment, multiplied by the number of complete years of service and divided by 15. Any sum received or receivable from an approved pension scheme must then be deducted from this amount.
Once the exemption levels are exceeded, payments are subject to tax at the individual's marginal rate of taxation.
Because severance payments and pension entitlements are closely bound up, workers need to be sure how they affect one another, particularly if they plan to use their lump sum for pension funding.
Ms Mary O'Hara, of PricewaterhouseCoopers, points out that such pension planning must be done before an employment is terminated for it to be tax effective. "It is important employees get both pension advice and tax advice as one impacts the other," she says.
Finally, "top slicing relief" is available where the tax chargeable on the taxable portion of the lump sum exceeds the individual's average rate of tax for the preceding five income tax years.
For example, if the taxable portion of the lump sum payment is taxed at 42 per cent but the individual's average tax rate for the previous five years was only 38 per cent, then "top slicing relief" of 4 per cent of the taxable lump sum payment would be available, Ms O'Hara says.
Aside from tax, workers need to be aware of the implications a lump sum may have on their social welfare entitlements.
According to Ms Rachel Ryan, of the Irish Trade Union Trust, the main payment redundant workers apply for is unemployment benefit, which depends on their PRSI payments. However, the size of an individual's lump sum may affect how soon they are paid this benefit, delaying it for up to nine weeks although this does not apply to the over 55s.
For those not entitled to unemployment benefit, employment assistance is available, although this too can be affected by the lump sum as it is means-tested. Mortgage interest supplement is another means-tested welfare payment that may be affected by the size of the redundancy package.
Finally, workers have to decide what to do with the lump sum and, indeed, with the rest of their lives.
Corporate outplacement specialists, Sanders & Sidney O'Shea, caution workers against being panicked into hasty decisions. The company, which has advised workers at organisations from Guinness to the Defence Forces, has most recently been taken on by Gateway to counsel its 900 staff on how to deal with redundancy.
Managing partner, Mr Gerard O'Shea, says workers facing this scenario need to sit down and consider three main factors - their career, their lifestyle and their financial situation. They also need to draw up a detailed budget for the next three to six months, consider what is and is not realistic and then decide how to meet their commitments. This may include things like renegotiating loans with banks and building societies.
In cases where there is surplus cash from a lump sum, it could be used to pay off the mortgage, to bolster pension provision or invested for the long-term.
"Redundancy has both an element of risk and opportunity," Mr O'Shea says. The challenge for workers who have lost their jobs is to make the most of an unwelcome development.
