It's Vital To Understand The Best Way To Make The Most Of Your Redundancy

The Age

Saturday November 15, 2008

RAEGAN DURCH. Raegan Durch is a senior financial adviser and CFP with Mercer Wealth Solutions.

IN 2008, unemployment reached its lowest level for 33 years, but it seems we're in for a tougher time over the next few years.

The level is now about 4.3% and forecasters expect it to rise significantly in the next few years.

If you think your job may be under threat, how should you prepare? And if redundancy does happen, how can you ensure you understand what you're entitled to and, when you receive a redundancy payment, that you use it in the best way?

Being prepared is the best insurance

Unexpected events such as sudden illness, redundancy and unemployment can - and do - happen. However, unlike illness or disability, sudden unemployment can't be insured against (though mortgage insurance may cover your home loan repayments for a period of time). Being financially prepared is an alternative type of insurance. Have a budget and get debt under control. Try to save so you have cash in reserve.

Understanding your entitlements

Redundancy provisions vary across companies and employment contracts. If your employment is terminated, you would normally be paid your unused annual leave and unused long service leave, but you may also be entitled to a further payment. As an example, this payment could equate to four weeks salary plus two weeks for every year of employment with your employer.

Redundancy payments are subject to tax:

The unused leave portion of your redundancy is subject to tax, but is capped at 31.5%.

Some of the redundancy payment may be tax free - the tax-free portion is calculated as $7350 plus $3676 for every completed year of service.

Any payment made in addition to the unused leave and the tax-free portion is called an Employment Termination Payment and the taxation of this depends on how much you receive, how old you are and how long you have been with your employer.

Generally, Employment Termination Payments cannot be rolled over to superannuation - but there are exceptions. You should clarify with your employer exactly what you're entitled to and whether or not you have the option of rolling your employment termination payment over.

To illustrate the above, let's look at Max, who is 48 and receiving a redundancy payment after working for the same company for 20 years.

In addition to his unused leave payment, Max will also receive a payment equal to 44 weeks of salary (four weeks plus two weeks for every year worked), totalling $90,000. Of this amount, $80,870 ($7350 plus $73,520) is calculated as his tax-free portion. The balance of $9130 is his Employment Termination Payment and subject to 31.5% tax if taken in cash.

Max's employer has told him he is allowed to roll over his Employment Termination Payment into superannuation. If Max does so, some or all of the payment would be taxed at 15%.

Optimising your redundancy payment

In deciding how best to use your redundancy payment, there are several options. These will depend on your financial situation and personal circumstances (for instance, how long will it take to find a new job or are you planning to retire). They include:

Using the payment to reduce debts such as your mortgage, personal loans or credit card debts.

Rolling over the Employment Termination Payment into superannuation, potentially saving tax. As highlighted above, the ability to do this is limited but if you can, it may be tax effective. However, your access to the funds will be restricted until you reach your preservation age and retire.

Hold on to the money to pay day-to-day living expenses until you find a new job.

It should be noted that this article deals only with financial issues and there are other parts of a redundancy package (such as outplacement services and Centrelink benefits) that should be explored fully.

Lifetime employment with one company is increasingly rare and redundancy is much more common. Many of us will be made redundant at some stage and, understandably, it's a very worrying time.

At times like this, a financial adviser can help give you the clarity you need to make the right decision.

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