Understanding redundancy and its financial implications has become more relevant than ever in 2009’s turbulent economic environment.
In
These job losses are making redundancy a more common issue in many Australian lives. Welcomed by some, but dreaded by most, redundancy generally makes for a stressful time where big lifestyle and financial decisions need to be made. And making sense of it all can be tricky.
Ryan Love of Apex Partners says, “Fully understanding the financial implications of redundancy, such as tax consequences and changes to social welfare entitlements, helps you make an informed decision around making the most of your redundancy package. Once you know where you stand, there are a number of strategies you can take advantage of to ensure you get the best outcome from your payout.”
A financial adviser can be your best port of call to guide you through these strategies. The difference between no advice and good advice may be the difference in how well you manage the redundancy process.
Where to start?
Ryan says the first step is being aware of what you’re entitled to and how the payments affect your current plans and income. Ensuring you get your full entitlements can make a big difference in dollar terms.
“Many people are unaware of what they can expect from a redundancy package. Any outstanding wages, unused annual leave and long service leave should be taken into account. Then, depending on the nature of work and workplace agreement, there can also be a termination payment, some of which may be in the form of a tax-free lump sum.”
Tax implications
Where things start to get complex is with the tax consequences of payments. “Each component of the package is taxed differently and depends on a number of factors, so there are no hard and fast ways of discussing redundancy taxation – it all depends on the individual,” notes Ryan.
What each individual has in common, however, is the need for professional financial planning advice. “Depending on what stage in life you are at, the financial planning opportunities can be quite different,” says Ryan. “For example, in some cases you could direct your payment into superannuation to generate tax savings. If you are approaching preservation age or retirement you might be able to draw this out as a superannuation pension”
“Or, if you’re receiving any government benefits, such as family tax benefits, baby bonus, or low income tax offset, these could be impacted by a termination payment. A financial adviser can outline how other benefits may be affected and find ways to minimise the impact.”
Make sure you’re covered
In the event of redundancy, a natural reaction is to make cutbacks to maximise cash flow. “In the absence of an employment income, people often look for ways to reduce expenses. Some may view the reduction or cancellation of an insurance policy as a quick way to reduce costs. But at this time, it’s even more important that you are covered in case something happens,” warns Ryan. An adviser can help you review your insurance arrangements to determine whether your premiums could be funded more effectively.
An adviser can also explain how unemployment could impact the potential benefits payable under your insurance policy
Managing debt
The continuance of good debt management is often front of mind for those who have recently lost their main source of income. Ryan points out that this topic should be fully explored before taking action.
“One common issue with lump sum payments is whether or not you should use it to reduce debt, such as mortgage or credit card debts. There are different tax and social security implications between using redraw facilities and mortgage offset accounts and these need to be taken into consideration”.
Like the other aspects of redundancy, Ryan recommends seeking advice to help you with debt management, “Solid strategies to help you manage the debt, superannuation, insurance and tax implications of redundancy may help you get the best outcome out of your situation.”