If you’re unexpectedly off work for a lengthy period of time because of redundancy or illness your investment strategy could be thrown into disarray.

The key is not to panic and cash in all your investments, but to evaluate your finances and determine a sensible plan for your changed circumstances.

Count up your cash

Ideally, you’ll already have some money available in cash savings to cater for any emergencies or short-term requirements. Drawing on these funds will avoid you having to take out a loan or sell your investments at the wrong time – i.e. when your shares have fallen in value.

An important first step is to review your current living costs and see if they can be reduced. You could also look at any other assets you have which could be accessed if needed.

Review your investment portfolio

Whenever there is a major event in your life it’s worth reviewing your investment portfolio. Ryan Hughes, head of fund selection at AJ Bell Youinvest, says the important thing is to look at is whether your risk profile has changed.

‘For pension assets, assuming that you still have a number of years to go until retirement, it is likely that the investment strategy will not need to be altered,’ he says.

When it comes to your ISA and any other investments outside of a pension, think about whether you’ll need the assets to cover your living expenses.

Patrick Connolly, head of communications at financial advice firm Chase de Vere, explains: ‘The overriding questions are likely to be whether you will be relying on your investments more to help meet your living costs and whether you may need to access them sooner than you originally thought. If the answer to either of these questions is yes, then it is likely you’ll need to reduce the level of risk you are taking.’

If part of your portfolio is invested in high dividend-paying stocks or equity income-type funds, these investments could help provide some income while you are off work.

Evaluate your regular investments

It’s highly likely you won’t have the sufficient funds to keep up your regular investments when you’re out of work. In fact, trying to keep up these payments could prove to be the wrong way forward.

Neil Adams, head of pension planning at financial advice firm Drewberry Wealth, says it makes no sense to regularly lock away cash in long-term investments if you might soon need to liquidate them again to meet living expenses.

‘Continuing to make regular share purchases while you have no income is especially risky in this respect. It could be disastrous if you need to access the cash a few weeks later and markets have declined,’ he warns.

If you’ve been making regular pension contributions you might be forced to cut these down. Under HMRC rules, non-earners are limited to annual pension contributions of £2,880 (which
is grossed up to £3,600 with tax relief).

Most modern pension plans allow you to stop and restart contributions without applying charges or penalties, but this might not be the case for some older policies.

Long-term vs short-term needs

In an ideal world you would continue to focus on your long-term financial goals, but this isn’t always possible. Short-term objectives, like paying the bills, will take priority.

Connolly recommends keeping your finances as flexible as possible. ‘This means that long-term savings might have to be put on hold until you are working again. When you are back working you may then need to give your long-term savings an extra boost to make up for any shortfalls, especially if you’ve used some of them to pay for short-term costs,’ he says.

Most experts advise having at least three months’ salary in cash to cover emergencies. ‘Only when this buffer is in place should attention turn to investing for the long term,’ states Hughes.

Interest rates on bank accounts and Cash ISAs are currently very low, but you could consider opening a high-interest current account. Some banks offer interest of between 3% and 5%. This rate could decrease after 12 months and there might be strings attached, such as having to pay a certain number of direct debits each month.

‘In the right circumstances these accounts can offer a home for regular contributions that will pay a return while remaining highly liquid with minimal risk,’ says Adams at Drewberry Wealth.

Don’t panic

Keeping a cool head is a must. If you do need to release cash from your investment portfolio think carefully about which investments you sell.

Adams says: ‘Selling high-yielding investments might fetch a good price today, but you’ll lose that income forever. Can you afford that in the long run?’

He suggests looking at the maturity dates of fixed term investments. If the period to maturity is short, waiting could be better than selling today.

If you’ve invested outside of an ISA, pension or other tax-efficient investment wrapper, sales of shares will likely attract capital gains tax (CGT) if they’ve increased in value since you bought them.

‘Planning is essential, as you can potentially offset capital gains with capital losses from current or previous tax years,’ says Adams.

Basic-rate taxpayers pay CGT at 10% whereas higher and additional-rate taxpayers pay CGT at 28% on residential property gains and 20% on all other chargeable assets. If you were previously a higher or additional-rate taxpayer, it might be better to liquidate your assets (assuming you have no other choice) in a year where your unemployment means you’re only a basic-rate taxpayer.

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