Coming to terms with redundancy is always hard. As well as the immediate emotional impact, there’s also the potential for long-term financial stress, so it’s important to make the most of your redundancy payment. And with the rules about to change on 30 June 2012, you may need to act fast.
If you’ve recently been made redundant, or you suspect you might be soon, there are some important emotional and financial issues you need to think about.
While redundancy is a shock, remember that is almost never your fault. Focus instead on your new job: preparing emotionally and financially for the future.
The first step is to decide how to put your redundancy payment to work.
What is a redundancy payment?
You may receive a redundancy payment if your employer dismisses you because the job you are doing is no longer needed in your current location. The amount you get is generally based on the number of years you have worked with that employer. They should give you details of your payment and how it’s been calculated.
It’s a good idea to speak to a financial adviser as soon as possible to make sure you’ve received everything you’re entitled to. Make sure your payment includes all relevant years of service and follows your employer’s redundancy policy and your employment contract.
If you’re under 65 and you don’t have a new job lined up, you could also benefit from some considerable tax concessions on your payment.
How much tax will you pay?
The taxation of redundancy payments is complex, even by the standards of tax law. Here’s an overview.
Your payment includes both a tax-free component and a taxable component.
In the 2011-12 financial year, the tax free component will be equal to $8,435 plus $4,218 for every complete year of service. The part of a redundancy payment in excess of the tax free limit will be an Employment Termination Payment (ETP).
Up to 100% of your ETP may be taxable, depending on (among other things) your years of service and whether there is a tax-free component. However, tax rates on ETPs are extremely complex, so it’s important to consult a tax adviser to get the full picture.
There are also special transitional tax rules for anyone employed under a work contract or workplace agreement made before 10 May 2006. If you qualify, that could allow you to benefit from a much more favourable tax treatment on the ETP, whilst allowing you to contribute it into your super fund and attracting only 15% tax (if within the concessional contributions caps).
But all that is about to change. From 1 July 2012, the transitional rules will no longer apply. So if you qualify and you’d like to take advantage of them, you need to act quickly.
Think about your financial needs
Turning to the bigger picture, it’s important to think carefully about how you will meet your financial needs until you’re back in the workforce. While it’s tempting to use a redundancy payout to boost your super or pay off your home, your first priority is to make sure your living expenses are covered until you find a new job.
That means it could be risky to put your redundancy payment into a longer-term investment like shares or property. If your job search doesn’t go to plan, you could be forced to sell your new assets at a time not of your choosing, simply to pay the bills. And while it can be a good idea to pay down debt, you also need to have money in reserve.
You may wish to apply for Centrelink benefits such as Newstart Allowance or the Disability Support Pension. Providing you are otherwise eligible for such payments, you may be required to serve one or more waiting periods before receiving your first payment. The relevant waiting periods are the income maintenance period (IMP) and the liquid assets waiting period (LAWP). It would be wise to check with your financial planner to see if you are eligible.
Depending on your age, you could decide to retire. If you’re 60 or more, contributing your payout to super could be a smart move. Not only are you able to withdraw the money free of tax, but you can also convert it to a tax-free pension. Favourable tax rules also apply if you’re aged between 55 and 59.
How have you coped with losing your job?
First published on Colonial First State’s Wealth Generation – Investor Knowledge Centre