Cash or outplacement – which should you choose?

By Ian Gooden, Chiumento

Cash or outplacement? It’s a choice some employers give to their people when exiting from the organisation. So how do you choose which to take? Chiumento MD Mike Burgneay gives his opinion.

Taking the cash might seem a sensible idea

When you are faced with redundancy one of your first thoughts is often: how am I going to pay the bills? No matter how much we earn, we tend to adjust our financial affairs accordingly. From how big a mortgage we take out to what loan we borrow to finance a new car, we all make financial decisions influenced by affordability.

What seemed affordable in employment might suddenly be unaffordable in redundancy. The thought of a bit more cash in the bank as a buffer is no doubt attractive on the surface. However I’d urge you to consider if that buffer is material enough to make a real difference.

What’s the real value?

One of the great advantages of outplacement is that it is a non-taxable benefit in the UK. So if you take the outplacement programme there’s no sting in the tail.

Whether the cash alternative is taxable depends on a lot of factors and I am not an accountant. Just make sure you know whether taking the cash is taxable or not.

In England only the first £30,000 of redundancy pay is tax free. So if you are already beyond the tax free limit you’ll pay tax on the cash alternative at your marginal rate of tax. So what appeared attractive at first glance might look less enticing if you are facing a 40% tax charge.

Loss of income should be your focus

I always advise delegates faced with this choice to do some simple mathematics. That starts by thinking how much each extra day of unemployment is going to cost you in lost salary.

For example, if you earn £50,000 a year in salary what is that worth? Keeping the maths really simple a week is roughly £50,000/52 = c.£960 a week. Assuming you work five days a week, each day of lost salary is potentially worth £192.

Let’s imagine you’ve been offered £2,000 in lieu of outplacement. And that’s tax free. That £2,000 will make up for c,10.4 days of unemployment.

Turning that on its head, if an outplacement programme can get you back in work at least 11 days faster you will be better off. 11 days of pay being worth more than £2,000.

How long will I be out of work for?

That’s a really hard thing to answer. Again there are lots and lots of variables. From where you live to what you do. The more senior you are, or the more niche the work you do, the longer job search time you are facing.

I’m not a statistician either. The way the UK publishes unemployment data makes it really hard to calculate the average length of periods of unemployment. Fortunately other countries publish that data in a really usuable format – which is brought together by organisations including the OECD.

The latest data I could find when writing this article is that the average Canadian is out of work for 4.9 months. If we assume 22 working days in a month that’s a total loss of earnings of around 108 days. The average Chiumento delegate resettles in 75 days. 33 days or or almost 6 weeks faster.

The average American is out of work for even longer at 6.8 months – or almost 150 days. I know the markets are different but it really shows how much impact outplacement support potentially has. The cash alternative could easily be dwarfed by the benefit of getting back into work faster.

Do the sums for yourself

No matter what cash alternative you are offered simply do the maths. How many days faster would you have to resettle to be better off with outplacement rather than taking the cash?

Of course if you think you can walk out of one job and straight into another then banking the cash makes sense. If you think your job search is likely to take more than 75 days then outplacement might well be the better bet. Ultimately whether you take cash or outplacement is your call.

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