Redundancy: pay off debt or save lump sum? 9 November 2022 at 9:13AM in Redundancy & redundancy planning 9 replies 573 views

Srahg

I have recently been made redundant & I would like to know if it makes more sense to use my pay out to pay off my debts, leaving me only about 1 months breathing space to find another job or if I should keep the lump sum to live off while I find alternative employment? 

tightauldgit

Really depends on your situation, how confident you are of getting work quickly, how much the lump sum is etc. 

I would suggest that you probably don't need to rush to pay off the debt unless its really burdensome, so probably better to hang off until you get a new job and then pay the debt? 

On the other hand if the lump sum is substantial then you could make a partial payment on the debt and keep a bit more back for living expenses?

I'd be reluctant to spend my savings to pay off a debt to just leave myself 1 months breathing space unless I had some backup plan

Ponsienella2

I would use lump sum to live off and then after you have landed a new job, and feel it is secure, use most of the money to pay down debts. I wouldn't risk paying off the debts and not finding another job, especially as you would then be unlikely to claim out of work benefits due to being considered to have deprived yourself of assets. 

MalMonroe

Hi, I would do the same as Ponsienella2, above. Hope things are going well for you and that you have found a new job - or will do so very soon. 

pjcox2005

Ponsienella2 said:

I would use lump sum to live off and then after you have landed a new job, and feel it is secure, use most of the money to pay down debts. I wouldn't risk paying off the debts and not finding another job, especially as you would then be unlikely to claim out of work benefits due to being considered to have deprived yourself of assets. 

Is this correct? Not my area but a lot of messages on these boards state payment of debt isn't deprivation for universal credit etc.

What level of debt do you have, what sort of interest rates and is it under control e.g. debt management plan or are you just making minimum payments. If high rates then you may want to pay off a proportion or at least call each lender to make them aware of redundancy and that you need them to freeze interest. Perhaps chat to stepchange as not sure if they'll eye up the redundancy payment.

Ultimately it may be that keeping it until you find a job is sensible but I'd get the full picture first particularly if not knowing means you eat into your savings for living when you could get benefit support.

macman

Which is higher: the interest rate on your debts, or the interest you could earn on the lump sum? Not nearly enough info given really.

Exodi

macman said:

Which is higher: the interest rate on your debts, or the interest you could earn on the lump sum? Not nearly enough info given really.

I agree with macmans thinking here - I don't think we know enough to blanket advise not paying off the debt.

If, for example, the debt is a credit card with ~30% APR, it makes very little sense continuing to pay high interest while you leave the money in a current/easy access account paying a sliver of that. It would be for beneficial, in this example, to use the lump sum to pay off part/all of the credit card, then should the OP need additional breathing room, put spending back on the credit card.

It really depends how opressive the current debts are, and what access the OP has to credit should they need it.

Personally, I'd put 'not paying off debt and leaving the lump sum in an easy access account' near the end of the list of potential options.

We haven't even touched on the mental gymnastics our minds playing on us by seeing £XX,XXX in our current account every day...

Brie

I'd be for paying off at least 1 debt, particularly if it is a high interest one.  This will be a relief emotionally as well as give you more breathing space to deal with the others which you can tick along with while you job search.

The only time I fully have understood using ALL the redundancy pot to clear debt was with a friend who made a huge payment on to her mortgage which brought her monthly payment for the remainder down to about the same as 1 week of JSA.  She was intensely frugal and had family to look to as well so that seemed a good solution for her specifically.

Coffeekup

I'd go with paying off debt's that you're paying interest on, especially overdrafts as they cost the most. If any of the debts are interest free I'd pay the minimum till you find a job and then pay them off... Then what you were paying on debt repayments move that money into savings and never get in debt again.

Exodi

Brie said:

The only time I fully have understood using ALL the redundancy pot to clear debt was with a friend who made a huge payment on to her mortgage which brought her monthly payment for the remainder down to about the same as 1 week of JSA.  She was intensely frugal and had family to look to as well so that seemed a good solution for her specifically.

But the debts could be flexible (credit card/overdraft/etc) so it's not necessarily that big of a deal if they put the whole lump sum into them.

If the OP then found himself short on cash, he could just go back to spending money on his credit card/overdraft again - at least he wouldn't be paying high interest in the interim.

But obviously this depends on what the debts are and why a blanket 'yes pay off debt' or 'no don't pay off debt' doesn't make sense without more information.