The first casualties of the Credit Crunch were those within the financial services community, where banks quickly started to lay off people in an effort to cut costs. Unfortunately, this trend is likely to expand into the ‘real world’ as businesses find they can no longer get adequate finance from the banks to sustain them through the downturn.

The very practical restraints on banks, even after taxpayers have poured billions of pounds into them to help their liquidity, make it difficult for them to lend to small businesses at the moment. It is to be hoped that this will change as interest rates fall – especially in the all-important inter-bank lending arena.

Nevertheless, it is likely that there will be increasing levels of redundancies during the next few months and beyond and it is therefore important to be aware of the steps you can take to protect yourself.

First, companies proposing to make 20 or more people redundant must consult a union or staff representative 30 days before any notices are issued (this period is extended to 90 days for firms making 100+ redundant). Employers should also consult each person to be made redundant in a “dismissal meeting” which sets out the severance package.

One of the most difficult decisions any employer faces (unless the entire workforce is to go) is how to select those who will be made redundant. The criteria must be fair and can reflect skills, adaptability, performance and attendance, but may not be based on union membership or legitimate activities, maternity or other potentially discriminatory aspects.

Employers must also, where possible, offer alternative employment as well as time to make a transition without loss of rights; they must also allow reasonable time off for the employee to seek alternative employment.

Should the worst come to the worst, there are state benefits that can take the immediate financial pain out of the situation. These include an age-based Statutory Redundancy Payment (SRP) which, subject to some limits on length of service, can provide up to £9,900 in tax free benefits. Employers can, of course, pay more than the SRP and anything up to £30,000 (other than contractual payments) is normally free of tax.

If any part of your redundancy package is likely to become liable to tax, you could opt to put it into a pension contribution; if your employer makes the contribution on your behalf, there is no National Insurance payable by either of you. This approach might appeal to the over 50s (over 55s from April 2010) who can immediately draw 25% as a tax free lump sum and then buy an annuity with the balance of the fund, or leave it within the pension fund (hopefully to grow).

Few people, however, are likely to receive more than the minimum so it is important to consider the adequacy of your personal insurance. Many payment protection schemes set up alongside a mortgage or some other loans will include not just illness and accident, but also unemployment. These schemes normally, however, only cover interest payments, not capital, nor do they provide for general living expenses.

It is possible to arrange insurance to cover more general income replacement in the event of unemployment – although the market is contracting due to underwriters’ fear of increasing numbers of claims during a recession. This is frequently hedged around with restrictions – many schemes will not cover the self-employed or those working for family businesses – and cover is normally only available for up to one or two years. On the other hand, few people believe that the recession will last for very long, so cover lasting 12 or 24 months should be adequate for most.

Mind you, if you really want to protect your income, you could become the new boss at Royal Bank of Scotland, with a salary of £1.2m and shares worth more than £6m!

As ever, you should take individual professional advice before making any decision relating to your personal finances. For further information, please contact Robert Bruce Associates.

NOTHING CONTAINED IN THE ARTICLE SHOULD BE CONSIDERED AS GIVING INDIVIDUAL FINANCIAL ADVICE. PLEASE NOTE THAT THERE MAY BE VARIATIONS FOR THOSE LIVING IN SCOTLAND AND NORTHERN IRELAND.