Wealth Watch: Take a reality check with redundancy cash

THE main concern for most individuals recently made redundant or facing this prospect is to make any redundancy payment last for as long as possible.

The first step in this process is making a realistic budget. An excellent tool is available on the Financial Services Authority's Money Made Clear website. When you have established your realistic budget, work hard to reduce your fixed costs. For example, shop around for the best deal on your utilities and consider a pay-as-you-go phone – look to stop or replace any insurance covers that you may have on your mobile phone as it is nearly always cheaper to buy a new phone these days than to pay the ongoing costs of the insurance package.

Also review and prioritise any of your other insurance packages (ie home contents, buildings and car insurance) and shop around for the best deals (the internet is a good way to search for this) – many insurers can now combine cover and will offer discounts against the premiums payable if you opt for this combined method of cover on policies.

Look through all your loan and credit card agreements as you may have taken out insurance against being made redundant (ie a Premium Protection Insurance policy (PPI)) on one or more of your loans or credit cards. Get in touch with your lenders to see if you can make a claim.

Receiving a large amount of money (ie your redundancy payment) can make you feel quite flush in the early days; however, it can be easy to fritter away the payment quickly. If you have made a realistic budget, you can place the redundancy payment into a separate account and pay yourself your planned budget – as a substitute income – this will help it stretch much further and will help to avoid the temptation of spending this sum on an unnecessary purchase.

For those receiving large redundancy payments, diversify across institutions making use of the £50,000 Financial Services Compensation Scheme guarantee. Also, do not forget you can put substantial amounts with National Savings & Investments which are 100 per cent backed by the UK Government.

It is important that you do not ignore your debt as this could lead to you being blacklisted for new credit if you don't keep up with your payments – so try to speak to your lenders early. Explain your situation, and if you are getting into difficulty, see if you can agree a plan to work with each other until you find alternative employment. Remember that your lender cannot automatically repossess your home if you fall behind with your payments – there are certain repossession procedures that must be followed first. If you are worried about repossession, you should call the Citizens Advice Bureau who can give you specific advice and run through the options with you.

Some councils, housing associations and lenders offer mortgage rescue schemes, which allow you to continue living in your home as a tenant or part-tenant/part-owner if you are unable to meet the full payments for your mortgage, but generally the rules for these schemes are very tight. This type of scheme is for individuals who are facing repossession and most government or a social agency will impose a cap on the value of the home. You should think carefully before signing up to a mortgage rescue scheme, although some schemes are effective and could help you to keep your home, others may simply increase your debts.

There is also the Homeowner Mortgage Support Scheme which has recently been launched by the Government. While not all mortgage lenders have signed up to this scheme a number have agreed to offer 'comparable arrangements'. The main features of this scheme allow you to defer some of your monthly interest payments for up to two years, your interest is added to the principal amount borrowed and can cover mortgages up to the value of £400,000. However, you must go through lender forbearance provisions first, including switching to an interest-only mortgage – fortunately the Government indemnifies the mortgage provider and many mortgage lenders will discuss the options with you.

Remember that you can use your personal tax allowances to great effect as you can put up to £3,600 into a Cash ISA in this tax year; alternatively you could make use of an Equity ISA, at £7,200 this tax year (this will increase to £10,200 in October for over-55s and on 10 April for everyone else) – the interest earned on these ISAs will not generally be subject to income tax.

Equity ISAs should only be considered for those who do not need the redundancy payment for the next five to seven years. Also, those over 50 should consider asking their employer to contribute any taxable elements of the redundancy payment (ie anything over £30,000) into a pension scheme. It may then possible to take an immediate lump sum and/or income from the pension. This is known as an immediate investing annuity and anyone considering this option should speak to an independent financial adviser for further help when considering this option.

For those with family and financial commitments they should consider life assurance cover – it is usual for traditional employer sponsored death in service life cover arrangement to cease when you leave employment. Therefore you should consider your personal circumstances and whether you need to obtain temporary life cover, especially if you have a family. This can generally be obtained online often at a relatively low cost.

It is also important that you register with your local Department of Work and Pensions (DWP) or Jobcentre Plus office for the Job Seekers Allowance. This will pay £64.30 per week to anybody with sufficient National Insurance Contribution records. It is not only important from an income perspective but claiming Job Seekers Allowance also credits you with National Insurance Contributions towards your basic state pension. In addition your local DWP office will also be able provide help on other benefits such as council tax benefit, housing benefit (if you rent), income support for mortgages and tax credits.

Help and advice is also be available from Citizens Advice Bureau (www.citizensadvice.org.uk), various Government agencies (www.direct.gov.uk, www.jobcentreplus.gov.uk/0800 0556688, and www.moneymadeclear.fsa.gov.uk) and the Consumer Credit Counselling Service (www.cccs.co.uk/0800 1381111). Any individual who is made redundant needs to explore the various options that are available to them so that they can help themselves plan through what is a difficult time.

Mark Howlett is director at BDO Stoy Hayward Investment Management