Can you afford to take time off work?

Taking an extended break from work has become increasingly popular in the past few years, whether as a solution for burnout, the chance to make a career shift, or simply to take some time to explore.

But if you’re taking leave from work, it usually means giving up, at least temporarily, the salary that comes with it. This can mean a big hit to your savings, as well as affecting your future planning.

Just because there can be financial implications, doesn’t mean you need to rule out the option. A study by Harvard Business Review found that people largely found a positive shift in their personal and professional lives after taking a leave. But ensuring you’re in a comfortable financial position before you take the leap can help you switch off or redirect as you hope to.

If you’re considering a sabbatical, here are a few things to keep in mind before setting your email to out of office.

Keeping an emergency fund

Regardless of what you will be doing during your leave, it is important to have an emergency fund in case of any unexpected life events. This is always a good idea but is especially important when there is not a stream of income to fall back on.

Typically, an emergency fund holds between three and six months of expenses. This should be separate from the money you have saved for your leave and can help give you assurance if a medical issue or unexpected home expense crops up, or you spend longer than expected finding a job when you decide to rejoin the workforce.

Understanding your company policy

Your company’s policy for leave can be a major determining factor of how to approach your finances on leave. According to the Chartered Management Institute, 53% of UK companies now have some sort of sabbatical policy. But those differ widely, both in terms of compensation and length of time. Often, sabbaticals start at a month of time off, but some can range up to two years. As of 2021, 10% of companies listed a paid sabbatical in their benefits package, according to a survey by WorldatWork.

It’s important to understand your company policy to determine if you will have access to any benefits during this time, such as private health insurance, or receive any pay.

Creating a budget for a career change

If you are taking a leave from your role for a career change, that may mean that you are leaving the company all together. This can add another layer onto your budgeting, because you might not have complete control over when your leave ends, if you are still searching for a new job.

If you need a new qualification, you will also need to consider this cost. For example, if you are leaving your current job to become a teacher, courses can cost nearly £10,000 per year, not factoring in food or housing costs. If you want to move into Human Resources, qualifications from the Chartered Institute of Personnel and Development (CIPD) can cost between £1,300 and £7,000.

Depending on what you plan to get your qualification in, you may be looking at a salary increase in the future. According to the Office for National Statistics, workers who changed industry increased their median hourly salary by 10.9%, while those who moved jobs but stayed in the same industry only increased by 8.8%.

But paying back debt accrued during your time off can quickly eat into any gains in salary, so try to ensure that you are able to make it through this time without spending beyond your means. This could mean cutting back your expenditure, foregoing expensive holidays, or saving money through living with housemates or a family member if the budget is tight. Of course if you’re studying for a career change, taking on debt may be necessary, and the ideal situation would be to pay it off as soon as you can when you start working again.

Taking a leave to travel

If you need a more “Eat, Pray, Love” style break, your budget may already be filled with flights and accommodation. One of the benefits of travelling is that it can be done for a large sum of money, or for relatively little.

Some jetsetters even take the strategy of allotting themselves a specific budget, and when that is used up, taking the next flight home. But you can also plan your trip in advance and set yourself specific budgets for different locations. For example, you may be able to visit Thailand and spend £40 per night on a 4-star hotel. But if you are spending another part of your trip in Switzerland, you could spend more than that amount for a night in a hostel.

Other travellers may choose to do some work along the way in return for room and board. Whatever your style of travel is, ensure it’s affordable on the money you have saved, and that you have access to an emergency fund in case anything goes wrong. Travel insurance can also help protect you from unexpected medical bills or complications along the way. Many of these policies are under £100, and cover medical expenses abroad, lost valuables, and reimburse trip costs if it needs to be cut short.

While you’re busy riding your Vespa through Tuscany, there are also considerations to take care of at home. If you are a homeowner, you will still need to factor in the cost of your mortgage, utilities, and council tax. If you’re a renter, and your lease won’t be ending, you may consider subletting your apartment (if allowed) to defray some of the cost while travelling.

Travellers will also need to be aware of the rules around insurance. Most insurance companies will not provide standard home insurance if a house is left unoccupied for 60 days, and in some cases, as few as 30. Be sure to check your policy and understand if you need to make other arrangements.

Preparing for the future

If you are taking a longer break, it can also be helpful to be aware of how it will affect your pension. If you are on an unpaid leave, your company will likely not be paying into your pension at this time. This may mean you have to play a bit of catch up when you get back.

Even if you aren’t working, you can still make a contribution to your SIPP of up to £2,880 per year and get basic rate tax relief from the government, as long as you’re under 75 years old. This might not be feasible on sabbatical though, as you will probably be directing your financial resources to your time off. You may also find that by waiting until you’re back in work to make those extra pension payments, you qualify for more contributions from your employer, or more tax relief from the government, if you’re a higher or additional rate taxpayer.

Another option, if you are planning well in advance for your leave, is to increase your contribution in the year before to make up for the time off. That way your money is in the market for longer and hopefully growing while you’re on leave.