Redundancies are common these days. Tech, pharma, finance and consulting workers know the wind can change at brutal speed. You’re sipping your free wellness smoothie one minute and out the door the next. When redundancy is in the ether, it’s good to have a financial plan.
Drug giant Pfizer is the latest multinational to announce job cuts here. Some 210 of its workers will go over the next year. TikTok, Wayfair and Flutter announced cuts earlier this year. It was Accenture before that, with 890 redundancies announced last year. This followed cuts at Intel, Meta, Microsoft, Google, Stripe and Amazon. There was a snap cost-cutting cull at Twitter too, with 50 per cent of its Dublin office gone. Those are just the ones that made headlines.
Derek Maguire, a financial planner with Financial Architects, gets about six to 10 enquiries a week from workers dealing with voluntary or compulsory redundancy.
“The average person coming to us would be on about €100,000, maybe €120,000; they are typically aged 50-plus,” says Maguire. They are skilled and, with the country at near-full employment, they will get another job if they want it, he says. Nevertheless, the prospect of redundancy requires some financial reckoning.
“The main questions people ask us are, ‘can I afford to take six months or a year off?’ I hear that all the time. They are flat out and they want a break,” Maguire says.
Where there’s an offer of voluntary redundancy on the table, people are nervous of leaving a generous pension scheme.
David Looney, a qualified financial planner with Alpha Wealth in Cork, has helped a lot of people dealing with redundancy this year. Most are skilled, well paid and will have the chance of moving to a similar role.
“Sometimes it’s about giving them the reassurance that they are in a financial position that they can take a bit of time off,” says Looney.
“Some are almost happy with redundancy. It can give them a financial cushion to take some time off work, to travel, pay off the mortgage, or spend time with the kids before taking up a similar role.”
Both warn that it’s imperative that those dealing with redundancy don’t rely solely on canteen chats or a colleague’s WhatsApp group for financial advice.
Your individual severance package, and your tax, pension and savings position will all shape what redundancy will mean for you. Everyone is different.
“I remember a case where one person made the wrong decision about how to take redundancy, and eight colleagues followed them and did the same thing, so they all made the wrong decision,” Maguire says.
Severance package
A severance package might be broken down into three elements, says Looney.
The first includes things like holidays you haven’t been paid for, or pay in lieu of a notice period. Maybe you have a bonus due, too. All of this goes through as a normal salary payment. If you are earning over €42,000, or €44,000 from next year, it’s going to be taxed at the top rate.
“There’s not a whole lot you can do there, there are no tax-free exemptions,” says Looney.
The second element is the statutory redundancy payment. This part is tax-free. Statutory redundancy is the minimum an employer must pay. It equates to two weeks’ gross pay for each year of your service, plus another one week gross pay. The weekly pay, however, is capped at €600. So whatever you earn, this will equate to €1,200 multiplied by your number of years of service, plus €600.
The third element is an ex gratia redundancy payment. This is paid at your employer’s discretion.
An ex gratia payment of six weeks’ pay per year of service as a lump sum would be typical, says Looney. Part of this ex gratia payment is tax-free and part can be taxable at your marginal tax rate. There are three ways to determine the tax-free part under Revenue rules.
There is the basic exemption, the increased exemption and the Standard Capital Superannuation Benefit (SCSB) – this is a tax relief that normally benefits people with higher earnings and long service. Your employer will typically crunch the numbers for you and the highest answer will determine how much of the ex gratia payment is tax-free, says Looney.
There is another option you have. If, when calculating the tax-free part of your ex gratia payment, the increased exemption calculation or the SCSB is giving the highest tax-free payment, this can mean waiving your right to a future tax-free lump sum from the part of your pension pot related to that employment.
“So, sometimes the employee has to tick option A to waive their right and take more of their redundancy payment tax-free now, or else tick option B and retain the right to take a tax-free lump sum from their pension on retirement and, in turn, take less of their redundancy payment tax-free now,” says Looney.
[ Pension tax relief rises to cover pots of up to €2.8m by 2029 under Cabinet plansOpens in new window ]
It’s a case of deciding, do I want more tax-free now or later?
“Sometimes people automatically think, it’s best to get as much as I can tax-free now, but they can end up shooting themselves in the foot down the line, particularly if they have a fairly decent pension,” Looney says.
He gives the example of a young tech worker who has built up a pension pot of €100,000. If this grew over 30 years, it would be worth more than €400,000 by the time they reach 60. At that point, they can usually take out 25 per cent as a tax-free lump sum, which is over €100,000.
“That can be quite handy down the line for clearing your mortgage or wiping out any debts and basically helping set you up for retirement,” says Looney.
Where the pension amount with your employer is small, however, it might make sense to waive the right to the retirement lump sum for that part of your pension and to take more tax-free now as it won’t have a big bearing on your pension, he says.
It comes down to cash flow, too. If you don’t have savings and are concerned about being out of work for a long time, you may need to prioritise paying your mortgage.
Some workers want to know if they can afford to take a less well-paid, but a less stressful job next, Maguire says. “I spoke to someone on over €120,000 who was asking if she can afford to take an €85,000 job next. She said, I’m killing myself here at the moment. I don’t want to be killing myself.”
Pension options
If you are due a fairly decent severance package, it can come with a big tax bill. One thing you can do to help minimise it is to make a last-minute pension contribution. This has to be done before you leave the company, says Looney. Once you leave an employer, you can’t make a backdated contribution.
You could take some of your holiday pay, payment in lieu of notice, any bonus or potentially your severance payment and put that into your pension, says Looney.
Your scope for pension contribution is dependent on your age. Someone in their 30s can contribute 20 per cent tax-free.
“The whole amount would arrive in to their pension and have the potential of growing tax-free in to their retirement rather than it being taxed through the severance payment,” Looney says.
Move your pension pot?
When your role is made redundant, it can be tempting to pull up anchor with that employer entirely – but yanking out your pension pot may not be the best choice.
“It can be advantageous to keep your pension pots separate, if you can draw them down at different points in time,” says Looney. “If you move it all into your new employer’s scheme, you might be restricting your fund options and also you may not be able to access your pension pot until you leave or retire from the company,” he says.
Social welfare
When you lose your job, register with your local Intreo office or social welfare branch, even if you don’t qualify for an unemployment payment. You may be able to get credited PRSI contributions to avoid a break in your social insurance record. You may be entitled to a tax refund.
Those with enough PRSI contributions should qualify for Jobseeker’s Benefit. That’s a payment of up to €232 a week, paid for a maximum of nine months, after which you can reapply.
There is a sliding scale as to when you can get your first payment. If your redundancy payment is €50,000 to €55,000, for example, you are disqualified from claiming Jobseeker’s Benefit for one week of the nine-month entitlement. Those getting a redundancy payment of €90,000 and over are disqualified for nine weeks.
All change
Older workers used to be the ones in the redundancy crosshairs. Some companies operated formulas, notes a company remuneration insider. One veteran tech employer operated the “75″ rule – if your age and your number of years’ service exceeded 75, your number was up.
A financial institution operated a policy that if you were over 50 and on more than €50,000, it was time to go. Not all, but some staff looked forward to eventually meeting the criteria to get paid to go.
Rolling redundancies are the operating model in many sectors now.
“This year, we are seeing redundancy packages to a much younger cohort – within tech companies, for example,” Looney says. “We are dealing with people in their 20s and 30s getting redundancy packages.”
As well as company metrics for employee wellness, there are metrics around salary and pension costs, too. When an employee becomes too expensive, says the insider, then comes redundancy. When a shareholder flaps its wings in Silicon Valley or China, it can mean a tornado for workers here.
“Some are handpicked, they will get rid of the deadwood, and then they will look at costs. Are there people we can replace, perhaps for a lower salary and pension?”
If you wonder why the average age in some companies never edges past 30, it’s not because the employees don’t age.
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