Monday 2 November 2015

October 2015 Update

This month sees an ongoing reduction in our cash reserves (as intended). The markets have been doing what markets do, but the end result is a slight uplift to our investment portfolio from last month.

I am still waiting for the "aye" or "nay" on voluntary redundancy, but in the meantime, a colleague's discussion with the council's senior pension officer has raised an interesting point. He advised her to apply for VR this year rather than wait until next in the hope that by doing so she will beat proposed legislation to cap public sector redundancy payments.

Make no mistake I agree wholeheartedly with the statement that It’s not right that highly paid public sector workers should receive huge taxpayer-funded payouts when they’re made redundant" (Greg Hands, Chief Secretary to the Treasury). However some interesting effects of this ruling come about because the cap is to be applied to all forms of compensation on redundancy. And yes, this could, in slightly different circumstances, have meant me.

My top line salary is around £33,000 (pro-rata £26,000 as I'm part-time). I have worked in various part-time/full-time roles in local government for a total of 17 yrs 360 days, earning much less than I do now for the bigger portion of that time, before I funded myself through my MSc and got myself promoted. 

My colleague (the one who had the conversation with the pensions officer) is the same grade as me but works full-time. She has worked in local government for over 40 years, also in a variety of roles and, until the last 8 years or so, at much lower rates of pay. I wouldn't consider either of us "highly paid" even now, but we do both have long service and are in our late 50's, and that means that we are now eligible to receive our pensions if we are made redundant. This is where we (or people like us) could fall foul of the £95,000 cap.

If I am made redundant the system works like this:

I am entitled to redundancy pay of £24,000. 

Because I am now also eligible to claim my pension, the entitlement I have built up until the day I leave becomes payable without actuarial reduction. This is funded mainly from the pension fund coffers, but the actuarial reduction that would have been applied if I hadn't been made redundant has to be "made up" from local government funds (i.e. you and me - the tax payer). A quick calculation of my figures for this component works out somewhere around £18,000 in total. The actuarial reduction reduces for every year closer to scheme retirement you get, so in year 1 - from age 57 to 58 - it is 37% - around £3,300, in year 2 from age 58 to 59 - it is 34% - around £3,060 and so on (My total pension will be circa £9,000 by March 2016). In addition my tax free lump sum would also be granted without the actuarial reduction of around £1,000.

I will therefore be costing the tax payer £43,000 in total to let go. So it's not hard to imagine a situation whereby someone who has been in a middle income technical/professional/managerial role in local government for significantly longer than I have and/or has very long service and consistent full time employment, could fall foul of the cap. Someone of my age with built up pension entitlement of £18,000 a year would be very fast approaching the limit. On the other hand if I'm made redundant, the tax payer doesn't have to find my salary for the next 9 years, so saving themselves £234,000. As a "by-product" we have the degradation in the service I help to provide if I am no longer there, which is difficult to assess, but I would guess that it will eventually be significant. I really can't see how the slack could be taken up by the existing infrastructure as we've got way past that point now. "Value for money" for the tax payer is very difficult to assess depending on what that particular tax payer values. :-)

How I feel about this is mixed. On one hand I totally agree that large costs attached to redundancy for public sector workers should be tackled, especially the situation - which I have seen - whereby someone gets made redundant and is then re-employed, often as a "consultant", a couple of months later (mainly because the work still needs doing and in this way the "paper" costs have been reduced and the boxes ticked, but the person who can do the job most efficiently is re-employed to do it). But on the other hand I object to the "spin" that this change in the rules will only apply to "high earning" public sector workers.

I have no objection to being treated with fairness (even if that is via a degradation of the terms on which I embarked my employment) but I want it to be recognised that this is what is happening. Public sector workers, many of whom have professional qualifications doing jobs that do not have comparable roles in the private sector, have been taking a hammering on salary and status for a considerable time now. Maybe things will go OK if we decide that we've had enough and opt out back into the private sector where at least you're treated with "dog eat dog " respect. Maybe not. I suspect that we will all find out before too much longer. Personally I just hope to be allowed to go without having to see the mess I'll be leaving behind, either with redundancy "benefits" or without.

24 comments:

  1. Also worth looking into the tax consequences of redundancy. Currently a mistaken belief you can always get £30,000 redundancy tax free. If you can't then can you time the redundancy so it happens near the start of a tax year in which you'll have no other taxable earnings. And bear in mind too that there is a current consultation to "simplify" the tax treatment of redundancy payments generally (i.e charge more tax on them).

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    1. Hi David. I believe that my redundancy pay will be issued in April 2016 (if I do get accepted) - therefore avoiding all the tax issues? and how does payment relate to the personal allowance for the 2016-17 tax year? - I'm not sure so I do need to find out. Thanks for flagging this up.

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    2. I think if it's deemed to be taxable then it's considered income in the 2016/2017 tax year (if received on or after 6th April 2016). The rules are complex but I think whether or not it's taxable basically comes down to whether it's contractual redundancy entitlement. At the moment most companies manage to fix things so it's all outside of tax up to £30,000 - hence the plans to rein this back in, not sure when from.

      National insurance is another issue. I think if non-contractual it's exempt from any NI.

      I am not a tax expert so I suggest you check this all out as part of the negotiations.

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    3. Thanks again, I certainly will make sure I check things out when (and if) the time comes :-)

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  2. I agree with you Cerridwen that sometimes the redundancy system can be too generous and open to abuse, especially within government. I know of one person, who shall remain nameless, who is able to retire on full benefits right now however is sticking around at work because they strongly suspect that in the next year or two they would be made redundant. This is someone in upper management who, if let go and then took their lump sum on top, could probably expect a total payout well over 6 figures.

    I can't blame them really, it's a vast sum of money to turn down. Should it be allowed to happen though? I don't think that's what redundancy is designed for and at the end of the day it's all of us who pick up the tab. Am I right in thinking that there is no way to force someone to retire once they reach an age?

    Your circumstances are completely different of course and I certainly don't take issue with what you are hoping for. One of my parents did exactly the same. I take issue with those that purposefully linger beyond retirement age with the sole purpose of getting an extra payout. I hope you get the news you are hoping for and that the Westminster lot don't fiddle with it too much.

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    1. The system is well overdue for review that's for sure. There has been far too much paid out to high earners in the public sector in the past and, I would argue, even those of us in middle income roles are coming out with benefits that would be better directed back into services at the moment. But then I'm convinced that Mr Osborne's cuts are totally unnecessary anyway. In which case redundancy payouts would not be needed and things wouldn't be falling about our ears. This is where I find myself in a bit of a bind. I don't agree with what's being done, I directly see the harm it's doing so why should I feel guilty about (possibly) benefiting from the madness. (I still do though :-)) Thanks for the words of support.

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  3. Also it is also worth seeing if letting go of public servants by paying them higher redundancy amount, tax payers can be saved in future. So it is all about balancing present with future as government will not be taking the hit of huge salaries and other benefits which are currently being offered to public sector employees.

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    1. Thanks. That's very true. Cuts to public services save a shedload of money all round. It's what we're left with that worries me :-)

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  4. To the self-employed particularly these redundancy payments look quite outrageous

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    1. I agree. I'm sure they must. But it's like comparing apples with eggs. Totally different models of employment.

      In addition there's been many a redundancy payment that has been sunk into a business venture by someone attracted to the idea of being their own boss but, unfortunately, failing to make a go of it a fair proportion of the time - what a waste. Self employment is only suitable for some people, providing some kinds of service.

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    2. As you allude to yourself, self-employment seems eminently suitable for providing many services previously provided by council employees on generous employment terms. Self-employment, i.e. piece work or zero hours contracts, is the most common form of employment in the world. The advent of "workers rights" is a relatively new concept. I think your views are somewhat blinkered by many years of working for government.

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    3. I don't think I allude to any such thing. On the contrary I have distinctly said that the service I work with is something that would never be attractive to private interests as it has no potential to make profit.

      Yes, workers' rights are a relatively recent product of civilization in general - you don't object to progress in this area I presume. In which case I don't understand your point.

      If you find my views "blinkered" please do feel free not to read them :-)

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    4. We seem to have a 3 tier labor market in the UK; public sector (and parts of private sector); traditional continuous employment contracts; and zero hour/fake self-employment agreements

      Might be better to address the lack of rights that people on zero hour contracts and fake self employment contracts have

      If the cost of this is a further reduction in other workers rights that could well be a price worth paying

      You don't have to find people who haven't looked to change jobs because of the final salary pension scheme etc.

      One of the arguments for leaving the EU is that their labor markets are ossified into "insiders" and "outsiders" with limited employment rights. Reading all this it seems we fit right in

      meanwhile very week or so an ambulance is called to a Sports Direct or Amazon warehouse because an "agency" worker has collapsed on the job...

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    5. I totally agree with your comments about zero hours contracts and if I had been writing a "campaigning" post about employment rights (or the lack of them) of course that is where real injustice lies. As it is I was just writing my monthly update and including a review of (what I clearly admit) are over-generous benefits in my part of the world.

      (btw I don't agree that employment rights are somehow capable of being rationed and "spread around" in a "if I get less, you can get more" kind of way. Legislation should be passed to regulate the deteriorating employment market, but there seems to be little appetite for that at the moment).

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    6. Well that's the thing about the Conservatives isn't it, the "status quo" must be maintained at all costs

      Whenever there is obvious injustice its the "free market" and nothing can be done

      Funnily enough when the opportunity to kick traditional conservative bogeymen (foreigners, public sector, poor people who aren't pensioners) something CAN be done

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    7. I would personally draw a distinction between labour rights like a minimum wage, breaks during shifts, anti-discrimination, anti-bullying and so on....... and the "right" to your job continuing ad infinitum just because you're already doing it. I'd rather see a decent safety net like a more generous jobseekers allowance and housing benefit to cover a certain level of living costs between jobs than arbitrary redundancy payments based on which of Neverland's three types of employment you are in and how long you've been there. Because at the moment some people get more than they need and find a new job or retire straightaway, while others miss out and suffer, all on a fairly random basis.

      I'm not at all keen on the French system where it's almost impossible to get rid of people. The world is changing fast and, if we don't adapt to that, the Chinese and Indians will eat us for breakfast. It might seem unpalatable to reverse what seems like progress, but we have to face the reality that the West isn't as wealthy as it thinks it is.

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  5. No need to feel bad, you have a contract that currently entitles you to these terms, a minority do perceived very too well out of them that it's creates of the headlines but at the end of the day they are there for a reason. In my private sector job I've got traditional redundancy terms, upto a few weeks per years service capped at 2yrs salary, you pretty much need to be close to retirement age having worked for the same company all your life to get the max 2yrs.

    I'm not expecting or hoping for a redundancy, want to keep a job I enjoy as long as possible. If the worst happens it'll support me looking for a new job which could be more difficult to come across the older I get. When getting on the closer side to retirement age then it's value will switch to knocking down when I can retire or covering any shortfall till pensions kick in, I'm not planning for it (caveat) but look forward to how it could help me.

    We have a few at work holding out/wishing for redundancy, they can't afford to hand in their notice and while not a key worker (no one's key in private sector) they are doing a job that fits the current company needs.

    Caveat:- Who tracks what their redundancy payment could be, I do!! It's not part of my net worth calcs but I do track it on a separate worksheet, my job sector likes to do what seem yearly restructures, so far touch wood was put at risk once, handed slip by HR on what redund payment would be and confused the heck out of me, so now I track it - I give a little smile I pass my anniversary minus notice period.

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    1. Interesting comment RS, thanks. Tracking potential redundancy payments? I must admit that for most of my career the threat of redundancy wouldn't have entered my mind. I work for the public sector don't I - isn't it part of the deal that I have a job for as long as I want it? :-)

      That's all changed of course - but fortunately for me at a time that couldn't suit me better, with terms that are so generous, you're right, they do make me feel guilty.

      If redundancy does fall on my plate it will be a gift for me, but the younger ones that my current cohort of prospective redundacees (sic) leave behind are a pretty twitchy bunch of people who will jump before they are pushed, attractive packages or not. There won't be much left to "recruit and retain" in my part of the public sector following the cuts expected to be announced in the Autumn budget and another year of capped wage rises. The world is definitely changing :-)

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    2. I think tracking your potential redundancy entitlement would be quite depressing for most people. Many private companies only pay the statutory minimum, which means you're entitled to nothing at all until you've been in continuous employment for two years, and after that only one week's pay (capped at £475) for each year's service between the ages of 22 and 41 (a bit more once you're older). And you don't even get to keep it all if HMRC deem it to be a contractual payment, as it's subject to tax and national insurance at a rate of at least 32%.

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  6. I hope it works out in your favour, I certainly would if I were on a permanent contract.

    Just remember though, Labour would've been following the cuts if they'd gotten elected with Miliband - that is the severity of the situation, that even THEY admitted that they'd spent profligate amounts of money and said they'd have to implement austerity measures too... Doesn't feel fair when you're losing services, however it's difficult for the general public to see just how close to the brink we came...

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    1. Sorry M, I don't understand - you would what? if you were on a permanent contract.

      I don't agree that Milliband would have taken us in anywhere near the same direction - if you'd like to quote sources on this I'd be interested to see.

      And as far as "brinks" go I suggest you read some of the economic experts on what austerity has actually achieved (and all Telegraph links too - not a Guardian one to be seen - though there's plenty I could have used :-))

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  7. Hi Cerridwen
    Hope it works out for you, whichever way it goes. Interesting to see how things get calculated though, would never have thought that it could work out that you could fall foul of the £95k cap.

    I'm quite certain that I have redundancy looming over me - how and when is anybody's guess at the moment, could be sometime next year, could be the following year. Suffice to say I can't rest on my laurels and think that my job will go on and on - I need to keep in touch with reality and be prepared for when things go belly up!

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    1. Thanks weenie. I'm actually nowhere near falling foul of the cap, but someone like me who started off earning what I earn now and working full time throughout their career certainly could be. That was a surprise to me too but I do think that it's only fair that such a cap (even one far lower) should apply. It's bad enough that stupid level of pay-offs should exist in the private sector, the public sector should at least show a modicum of responsibility and probity.

      I really hope you don't get hit with a "belly-up" situation before you're ready for it. Being prepared is all :-)

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