If the doomsayers turn out to be right in their predictions, then we had all better take steps to limit our losses should the worst happen.

So during these troubled times knowing how to minimise your financial losses and get the best deal when faced with redundancy is a must. There is an old saying, that when your neighbour loses his job, it is a recession, when you lose yours, it is a depression – but planning ahead just in case can help you if you are one of the unlucky ones.

Tax

If you are a higher rate tax payer and have severance pay in excess of £30,000, then it is in your interest for it to be paid to you after you have left rather than while still in employment so that only 20 per cent tax will be deducted immediately, rather than 40 per cent.  You will have to pay the rest in 18 months time but in the meantime this can be a useful sum in your hands.

To reduce taxation to a minimum, also make sure you have the right investment structures or tax wrappers in place.  You may be paying 40 per cent tax when you need only be paying 18 per cent.

Regardless of the investments held, if you are able to use a capital gains tax approach to income generation from a portfolio rather than attract an income tax of 40 per cent, there can be a significant uplift in your net returns. For example, on a portfolio of £200,000 the savings may be £4,000 on an income of 6 per cent which is the equivalent of an annual capital uplift of 2 per cent a year.

Protection

You should ask your employer about transitional benefits as part of your leaving package – particularly if you know there is another job on the horizon. You may have a period of six months or more where you have no life cover, no permanent health insurance, no critical illness or family income protection and no medical insurance. These will stop from the day you stop being employed by the firm. You may be able to keep some of these going for a specified period to help you cover the gap. Even if your non-employment period is a lot longer there may be ways of transferring benefit policies from your old employment to you personally which would reduce premiums and avoid having to revert to new conditions, such as for pre-existing conditions rules under medical insurance.

Your Mortgage

Borrowing is fine if you have the stomach for it and can afford the consequences. If not, reduce debt down to a manageable amount. Check your existing mortgage rates with new rates - re-mortgaging can be well worthwhile, but do check redemption penalties.

The “one accounts” and traditional offsetting mortgages can work well, and with reasonable rates. The advantage of this is that for individuals with large mortgages and large bonuses the mortgage can be paid down easily and increased again as required without redemption penalties or application fees, thereby producing a maximum amount of flexibility and minimum amount of interest paid. However, it is basically a current account and you will need to pay some of your income into this account for it to work.

Using your redundancy payment in an offsetting arrangement can mean that you can reduce down your debt in the short term while income is uncertain and borrow more again when the time is right.

Check to see if you have a mortgage payment protection policy - these are sometimes sold with your mortgage and could prove very handy.

Cash

Capital Gains Tax vehicles

Gross rates of around 8 per cent are available in the new CGT vehicles over five years, with a variety of other rates over different terms. This means you will be taxed at 18 per cent (assuming you have used your CGT allowance for the year, otherwise it will be less) rather than 40 per cent. The downside is that you may only get your capital back and nothing more if equity markets fall below a certain amount.

Cash structures

These can work well over fixed periods and can be useful for paying a given amount at a given time – such as a forthcoming tax bill on your bonus.

Cash Bonds

These are open ended cash funds within bonds, where the tax liability can be deferred to a period when your tax rate may be lower.  Offshore bonds using Irish Banks can be a good option here.

Index-linked Gilts

Index-linked gilts are also a good safe haven as there is no CGT payable: they are a low risk government stock with reasonable income yields and the chance of some capital uplift given the inflationary economic climate. Generally annual equivalent rates (AERs) for longer term gilts are higher than the short-term ones.

Investments

Don’t encash and move out of the market unless you have to. Use the current market downturn to rationalise and clean out the dead wood in your portfolio. If you are in good shape you will maximise the upside when market conditions improve.

When it comes to investments never was the saying ‘time-in the market is more important than timing the market” so true. In an inflationary environment, you should definitely be holding some real assets and discretionary management can add value now rather than the long equity approach.

In addition, you can usually borrow against your portfolio and for the optimists this could prove excellent value, particularly given the excellent buying opportunities seen recently – but this strategy is only for the very brave of course, and not without taking advice.

Liquidity

Create a contingency plan to cover expected expenses over the short term. Use cash alternatives where possible to reduce the tax liability, or put some in your partner’s name if they have unused personal allowances or pay tax at a lower rate than you.

If you have cash in your self-invested personal pension (Sipp), you may be able to convert this into liquid capital,  transferring existing shares that you own into your Sipp - the pension then pays you the purchase price. You will have to pay stamp duty though.

Your Pension

Don't ignore your pension contributions unless you absolutely have to - it is a very good way of getting the equivalent of top level tax relief on your bonus. Although the basic rate is claimed back through the pension scheme, the additional 20 per cent is paid directly to you. Remember, you can fill in a claim form in between tax returns.

Depending on the length of your termination or contract terms, try and make sure pension accrual is included in your severance pay if you are in a defined benefit scheme, or further pension contributions are included for defined contribution schemes.  These can be worth very significant sums.

Consider asking for part of your severance pay to be transferred directly into your pension.  The advantage of this is that as a gross payment it would avoid the need to claim tax back and can therefore attract compounded returns from day one on the whole amount.

There are many useful options for drawing capital out of pension schemes - you don’t have to buy an annuity until you are 75.

Also, as an emergency measure, if you are 50 + (the age rises to 55 in 2010) you have a small window to release cash from your pension scheme to reduce down debt if necessary.

Julia Whittle is a Principal at Punter Southall Financial Management.