What Is Voluntary Redundancy and How Does It Work?

Have you been offered voluntary redundancy at your place of work? Are you concerned about the long-term implications and whether you will be able to afford your financial liabilities? The subject of voluntary redundancy in relation to income protection policies is often misunderstood.

So, would you be covered if you chose voluntary redundancy?

The whole idea of income protection insurance is to secure an agreed level of income each month if, for example, you are unable to work because of illness, injury or you have been made redundant.

What Is Voluntary Redundancy?

Voluntary redundancy is where you enter a consultation period for redundancy and volunteer to take it. If you have income protection insurance it is unlikely to pay out if you've chosen to take voluntary redundancy.

The idea of taking voluntary redundancy is an interesting one and something of a double-edged sword.

Looking for other information on the Income Protection? This guide has info on 'What is voluntary redundancy and how will it affect my income protection insurance'. We have also writen extensively about:

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What Are the Most Common Scenarios to Consider Voluntary Redundancy?

There are numerous scenarios which may prompt you to consider voluntary redundancy. The main ones include:-

• Restructuring of a business
• Skills no longer required
• Change of ownership
• Financial crisis

As the term suggests, when considering voluntary redundancy, you are under no pressure. You also need to be fully aware of the wider impact and how it might impact your short, medium and long-term income. As a consequence, it is worth taking advice if considering such a move.

Will My Income Protection Policy Still Pay Out on Voluntary Redundancy?

If you have unemployment cover in your income protection policy, then it is certainly worth checking the level of cover if you apply for voluntary redundancy. You’ll tend to find that those made redundant with no option will be able to activate the redundancy element of their cover.

However, it is unlikely that an insurance company would payout if you took voluntary redundancy.

What Level of Redundancy Should I Expect?

The whole idea of voluntary redundancy is that your employer should enhance their statutory obligation to reduce their long-term staffing costs. Your redundancy settlement will be based on your age, current salary and length of time with your employer.

It is very important to compare and contrast the voluntary redundancy package against your statutory redundancy rights. If there is a significant enhancement, and you are left with a lump sum payment, it may be worth considering.

Should I Wait for Compulsory Redundancy?

When an employer seeks voluntary redundancy, they will enter a period of consultation with their workforce. If they were offering ten voluntary redundancy packages yet only eight people came forward then in theory further down the line, there would be two compulsory redundancies. You would need to take advice with regards to this particular scenario because it is not as straightforward as you might assume.

In theory, if you were then made redundant without any choice, then this would activate the redundancy element of your income protection policy. It is worth reiterating that this cover would normally last up to 12 months (although it can be longer in certain scenarios). You would also need to have specific redundancy cover included in your income protection package.

Will My Payment Protection Policies Cover Voluntary Redundancy?

Even after the PPI mis-selling scandal, many people still prefer to have a degree of payment protection in place in the event their regular income is disrupted. This means taking PPI cover on loans, mortgages and credit cards as well as other debts you may have.

As with an income protection policy, it is highly unlikely that a PPI provider would payout if you took voluntary redundancy. On the other hand, if you were made redundant through no fault of your own, the policy would kick in and cover your payments for a predetermined period of time. Check the policy details!

Would Voluntary Redundancy Impact My Entitlement to Benefits?

To answer this question, we will put aside the subject of voluntary redundancy and look at savings held by you or your partner. If you or your partner have savings in excess of £6000, this will impact your ability to claim benefits.

However, it is important to note that not all benefits are means-tested, so it is still worth investigating any assistance on offer. The government is looking to bring all benefit payments under the universal credit system and while there have been some “issues”, if successful claiming for benefits will be much simpler going forward.

Do I Pay Tax on My Redundancy Package?

You will pay tax on a redundancy package above the £30,000 threshold, but it is tax-free up to £30,000. It is also worth noting that non-monetary benefits, such as a car would be included in that value. For example, the cash value of your company vehicle would be added to the monetary package, and if this took you over the £30,000 threshold, there would be a tax liability.

Can My Employer Force Me to Take Voluntary Early Retirement?

No. If you are approaching retirement age, then your employer may suggest taking voluntary early retirement as opposed to voluntary redundancy. In this situation, it is very important to take advice as you could potentially be missing out on a significant redundancy payment.

It would be sensible to take professional advice with regards to both your employee rights and the pros and cons of taking early retirement - as opposed to voluntary redundancy.

Can My Employer Make Me Redundant Because of My Age?

No. This would be classed as age discrimination as well as the fact that statutory retirement dates were removed many years ago. When making redundancies, your employer will need to undertake a period of consultation with their workforce.

It is also worth noting that many people have started to extend their working life, and indeed, life expectancy continues to improve as a consequence of medical advances. If we are living longer many will need to work longer to fund financial liabilities going forward.

Will My Pension Contributions Stop if I Take Voluntary Redundancy?

If you are part of a company pension scheme, you will not be able to make any more contributions after you leave employment. However, you may find that your employer will offer an enhancement on your pension or an additional pension contribution as part of your redundancy package.

The exact terms of voluntary redundancy packages will vary then from company to company. However, you should expect some form of enhancement, whether in the form of a lump-sum payment or improved pension.

Will a New Job Impact My Voluntary Redundancy Package?

Once you are in receipt of your voluntary redundancy package and have left your role, it doesn’t matter if you find a new job the next day or the next year.

What Should I Do About My Pension Entitlement?

When you leave your employer, whether, by choice, voluntary redundancy or compulsory redundancy, payments into your pension plan will cease, at this point it is worth taking advice regarding your pension entitlement.

You may be able to transfer this elsewhere, leave it until you are of pensionable age or if relatively small; you may be entitled to repayment. It is very important to take advice regarding pension funds because once a change has been made, it cannot be undone.

What About My Share Entitlement?

Many large stock markets listed companies will offer employees discounted shares as a form of bonus/incentive. Indeed, some companies may well offer an element of bonus shares relating to company profitability and individual employee performance.

When discussing voluntary redundancy, your entitlement to shares will no doubt be discussed. The majority of discounted employee shares need to be held for a certain period of time to maximise tax benefits. So, it may well be that you need to retain the shares within their current wrapper until the time period has expired.

If you have worked for a company for many years, then you may well have a significant investment via your employee discounted shares. Again, it is sensible to take advice regarding your investments and how best to proceed going forward.

Can I Rejoin My Former Employer After Taking Voluntary Redundancy?

The simple answer is, yes. There is a general misconception that when taking voluntary redundancy, there will be small print entitling the company to reclaim part of your financial package if you return to employment with them.

This is not the case. While many people may leave it “a few weeks” between leaving and returning, there is no statutory obligation to do this. Whether it may look better from the point of view of other employees is a whole different matter.

If I Rejoin My Previous Employer After Voluntary Redundancy, Do I Rejoin on the Same Terms?

This is highly unlikely. The whole exercise of redundancy would have, in some shape or form, been related to cost reductions. Therefore, it would not make business sense to re-employ somebody on the same terms after handing them a redundancy package. It would also be difficult to see how your previous employer could re-employ you in a similar role to the one you vacated.

On occasion, you will see employees contracted on different terms and conditions depending on how long they have been with their employer. For example, some of the long-term employees may have extremely lucrative pension rights which the company can’t afford in the long-term and needs to address. This is just one example where making an individual redundant and then re-employing them would make sense.

Summary

There is a general misconception that the rights associated with involuntary and voluntary redundancy are similar. If you have redundancy cover as part of your income protection plan, then it is unlikely that your insurer will pay out on voluntary redundancy.

On the flip side, you would expect to receive a significantly enhanced redundancy package compared to your employer’s statutory obligations. The pros and cons of voluntary redundancy are often complex, and it is certainly worth taking advice.

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