When the job goes ...

Redundancy is traumatic, but it can also mark a turning point in your life by opening up new opportunities, writes Caroline Madden

News of impending job cuts has been pouring in thick and fast over the last fortnight.

US technology company Seagate is shedding nearly 1,000 workers at its Derry plant. Almost 500 employees face the axe at troubled glassmaker Waterford Wedgwood and now Aer Lingus is seeking 51 voluntary redundancies at Shannon airport.

To date, redundancy levels in 2007 are running almost 10 per cent ahead of last year.

For many people, the facts and figures are simply indicators that the economy is losing steam, but for the 21,394 people laid off so far this year, these cost-cutting exercises will have turned their world upside down.

Being made redundant is a traumatic event, particularly for those who have dedicated most of their working life to one company, and often leads to feelings of anger and betrayal.

However, it can also mark a positive turning point in a person's life, forcing them out of a rut and spurring them on to finally pursue their dream career or even to start their own business.

From a financial perspective, redundancy often has a silver lining.

Yes, the uncertainty of doing without a monthly pay packet until a new job turns up is stressful, but many people walk away with the biggest lump sum they'll ever get in their lifetime, which can considerably cushion the blow of losing their job.

The key to getting the best out of the situation financially is for employees to be aware of their rights.

Although word of restructuring and redundancy can come completely out of the blue, rumours will often have been flying around the company grapevine for months and employees will have some warning signals that job cuts are coming down the line. Either way, employees are entitled to formal notice of two weeks if they have been working with the company for at least two years.

The minimum notice period increases with the individual's length of service. For example, staff members with more than 15 years of service under their belt are entitled to eight weeks notice.

Employees may be required to work the notice period, in which case they will be entitled to reasonable time off to search for a new job. Alternatively, they can accept payment in lieu of notice, if offered.

Once a person loses their job, the Irish National Organisation of the Unemployed (INOU) advises that they immediately contact their local social welfare office where they can apply for either jobseeker's benefit or jobseeker's allowance.

This is very important as any delay in making their claim could result in a loss of payment, the organisation says.

An individual's entitlement to jobseeker's benefit depends on their PRSI contributions.

If an individual doesn't have enough PRSI contributions to qualify for this support, they may be entitled to jobseeker's allowance although they will have to satisfy a means test.

(See panel for more details)

The third issue of which to be aware is that employers must make minimum redundancy payments to eligible staff. The size of this statutory payout depends on how long the employee has been with the company and their gross weekly pay, and is entirely tax-free.

Employees with two years of service or more are entitled to two weeks' pay for every year they have worked, plus a bonus week's pay. A cap of €600 applies to the weekly pay that can be taken into account for this calculation.

A useful online redundancy calculator can be found at www.redcalc.entemp.ie.

In some cases, the employer may go above and beyond the minimum statutory requirement, and make an additional ex-gratia payment to the employee. Multinationals in particular are known for their generous severance packages. The ex-gratia payment can include cash and assets such as a car, and is taxable, but only if it goes over a certain limit.

A basic exemption of €10,160 plus €765 for each full year of service is available; if this covers any ex-gratia payment, there is no tax due on the lump sum.

This basic exemption can be increased by a further €10,000, but only if certain conditions are met.

Employees can only claim this increased exemption once every 10 years. If the person is in an occupational pension scheme, the increased exemption of €10,000 will be reduced by any tax-free lump sum that the individual can take at retirement, unless they irrevocably waive their right to the lump sum.

Also, advance Revenue approval is required to avail of this increased exemption.

A third exemption limit known as standard capital superannuation benefit (SCSB) also exists, which generally benefits employees with high earnings and long service.

If the ex-gratia payment exceeds the relevant exemption limit, the excess amount will be taxable. However, top-slicing relief can reduce the tax bill.

Essentially, top-slicing relief ensures that the lump sum is not taxed at a rate higher than the person's average rate of tax for the three years prior to redundancy.

Many employers hire the services of external financial advisers to guide their employees through this financial maze, and help them to maximise their lump sum through tax planning.

In many cases, long-standing employees can walk away with a five- or even six-figure package in compensation for losing their job. So what should they do with this once-in-a-lifetime windfall?

This certainly is not a straightforward question, as an individual's investment strategy will depend on myriad variables such as their asset base, the likelihood that they will work again, whether their spouse is working, expenses, whether they have extensive borrowings such as mortgages, the age of any children and so on.

Therefore seeking financial advice is highly recommended.

"The first thing we would say to people is don't commit the package to anything permanent until you're sorted out in your next job," advises Brian Herman of Right Management, a consultancy which has worked with more than 1,000 Irish companies during redundancy processes.

"By all means, put it somewhere safe and secure but do nothing with it, because once you have committed, you can't access it if, for example, you need capital to start a business of your own."

Ian Mitchell, managing director of Deloitte Investments and Pensions, advises those who don't have a new job lined up to put away an emergency fund in case they run short of cash during the intervening period.

For those planning on going down the self-employed route as, say, a consultant, he advises salting away sufficient funds to survive on for the first year. Not only can it take time for those new to the consultancy game to get established but clients can be very slow in paying up.

If there is still money left over, people should consider reducing future expenses by paying off short-term debt or making a payment against their mortgage, although Mr Mitchell warns that the downside of the mortgage option is that it is inflexible.

Anything remaining of the package after that should almost certainly be put into a longer-term investment, he says, such as a buy-to-let property.

People also need to look at what's going to happen to their pension, Mr Mitchell continues. If they have been less than two years in the job, they can get back any contributions they have made. However, they will face a tax charge - bearing in mind the full tax relief they will have received on the original payments.

If they have been a pension scheme member for more than two years, departing employees should take advice on what they should do with their preserved benefits. It depends on the type of contract they have but, in general, the pension can be frozen or transferred to a new employer's scheme.

Finally, people should remember to splash out a little on themselves. Having weathered the upheaval of being laid off, taking a break and de-stressing on holidays could well be the best investment of all.