26 Jun 2013
Once it was something that only happened to other people, but in these challenging economic times, redundancy is fast becoming something a number of us may experience, so it pays to be prepared.
Redundancy can be a time of confusion. On one side a person is faced with losing a regular income and on the other they may receive a substantial payout – both present problems to be managed and both may present opportunities as well.
Facing redundancy can be an extremely stressful time, but before rushing in and making any decisions, it’s important for people to take stock of their current circumstances, immediate needs and plans for the future. Making the wrong decision can impact a person’s financial situation for years to come.
There are good redundancy stories. We all have a friend who was able to pay off their mortgage with their redundancy package and then land a better job a few weeks later. The loss of an old job may be the jolt a person needs to start a new career or be enough to energise a person to start their own business.
But for every positive experience, there are many that don’t go so smoothly.
Whatever the situation, it’s important to seek financial advice before any major financial decisions are made.
So, what can an employee expect to get? In redundancy, a person is entitled to receive any outstanding holiday pay, long service leave and other entitlements, as well as a payment as compensation. The payment will vary between employers and awards, but for example, could include four weeks pay up front, plus two weeks pay for every year of service.
One of the first questions a person may ask is, “Will I qualify for any Centrelink assistance?” This will depend on a person’s assets and assessable income. There are also waiting periods that need to be served before a person may be eligible for Centrelink assistance. This is one area where advice is crucial.
There are a number of factors to consider if redundancy is looming. One of the first things people should consider is preparing a budget – how much do they have in savings, what are their debt levels and how will they meet living and other major expenses. Answering these questions, will give a person a better idea of what to do with a redundancy payout.
A labyrinth of taxation rules surrounds redundancy payouts.
No matter how much a person receives, some of the money will go in tax. The good news is that redundancy payments are taxed at a lower rate.
It can get complicated, but generally, payments made under redundancy or early retirement schemes will have a tax-free portion (which can’t be rolled into superannuation) and an eligible termination payment (which may, in some circumstances, be able to be rolled into superannuation if certain criteria are met, otherwise must be taken as cash). Currently, $7,350 of the payment will not be taxed, plus $3,676 for each completed year of service.
Eligible termination payments are payments that exceed the tax-free portion discussed above. If certain criteria are met, the payment can be rolled into superannuation, deferring tax so that initially only 15 per cent tax is payable as the money enters the fund. Otherwise, the payment must be taken as cash with tax paid immediately.
The amount of tax a person has to pay also depends on how much of the payment relates to employment prior to 1983, the amount of the payment and a person’s age.
Accrued annual leave and accrued long service leave will generally be taxed at 30 per cent, even if a person is normally on the highest marginal tax rate.
Superannuation payments may have two components, preserved benefits and non-preserved benefits. Preserved benefits must be invested in an approved fund and generally can’t be accessed until 55 years of age. Non-preserved benefits can be taken in cash, with the tax rate dependant on the amount of the withdrawal, a person’s age and financial circumstances. But superannuation funds should only ever be accessed as a last resort.
Also, for those people who have insurance cover under their employer super scheme, it’s important to review arrangements as many insurance benefits could cease on termination.
What to do with a redundancy payout will have a lot to do with what stage of life a person is at.
Someone with a family will need to consider how they will meet all their regular responsibilities until alternative employment is found. While it may be tempting to pay off the mortgage, it may be better to wait and do this when employment has been found, just in case the funds are needed in an emergency.
A person nearing retirement will have to consider whether they can afford to retire. Those aged 55 can access their super funds as a lump sum if they choose to retire. Alternatively, they may be able to access their superannuation without retiring as a non-commutable income stream. A person should also contact Centrelink to find out what social security benefits they may be entitled to.
Even a young person without financial and personal commitments should think twice before spending their payout, as there is always a risk that employment may not be found as soon as expected.
There are many issues surrounding redundancy and each person’s circumstances will be unique, so it’s crucial to seek professional financial advice before making any decisions with what could be one of the largest lump sums a person will ever receive.
Amanda Pond is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.