Depending on your industry, redundancy may be commonplace or a rare but unwelcome occurrence. Let’s be honest – no-one likes to think that their job isn’t 100% secure and that they could be made surplus to requirements.
What we need to remember is that when redundancy rears it’s head, it presents us with a unique opportunity to re-assess our finances and potentially make a strategic investment for our future.
We rarely get asked any of the important questions about redundancy until it’s too late, so in the interest of better preparing those for whom redundancy is a real threat, I’ve answered some of the commonly asked questions below:
Q: Where do I start planning my finances following a redundancy?
A: If you are about to receive a redundancy payment there are several issues you need to consider:
- you will need to be able to understand the various components of your employer redundancy payment and these can be used to achieve your overall financial objectives
- before you make any changes to your superannuation arrangements, consider your insurance coverage as well as your ongoing investment strategy
- what are your cash flow requirements? How are you going to fund your living expenses while you transition to new employment or retirement?
- you may need to get in touch with Centrelink as you may be eligible for assistance. If you have an unused leave component in your redundancy payout, this could have an impact on when you become eligible for Centrelink assistance.
Q: What makes up my redundancy payment?
A: Depending on your situation, you may be entitled to all or some of the following lump sum payments:
- unused annual leave
- unused long service leave
- the tax-free portion of the redundancy
- the taxable portion of the redundancy, known as the ‘employment termination payment’
Q: Will my redundancy affect my super or insurance?
A: Yes, as you are no longer employed your employer no longer needs to pay superannuation guarantee payments on your behalf and any salary sacrifice amounts you nominated will also cease.
While some employer superannuation funds allow you to remain in the fund, some funds will automatically roll you over into a personal superannuation fund. Your employer superannuation fund should write to you to let you know.
If you start a new job, you may be able to remain in your super fund or join your new employer’s super fund. Remember that if you have more than one superannuation account, you are paying more than one set of fees and charges so you may consider consolidating your accounts. Before doing so, however, you should consider your superannuation options carefully, particularly around the insurance options that are available and speak to a financial planner.
When your employment status changes, (ie you leave employment or change employers) your superannuation arrangements may also change and this could also affect your life and total and permanent disablement insurance arrangements. Before closing your existing super fund, ensure that your new fund offers an adequate level of insurance cover.
If you’ve worked for your employer for an extremely long time, then your redundancy and your salary may push you over the $300,000 in the financial year if you are made redundant. If this is the case, you might have to pay high income earner contributions tax of an additional 15% on your superannuation contributions for the year.
Q: What is the difference between a redundancy and a ‘genuine’ redundancy?
A: A redundancy is ‘genuine’ or ‘bona fide’ when:
- the employer has made a definite decision that the job of an employee ceases to exist
- the termination is not on account of any personal act of default of the employee
- the dismissed employee is below normal retirement age.
From 1 July 2012, the availability of an ETP tax offset for ‘golden handshakes’ is limited. This will not affect those whose employment ends due to genuine redundancy, invalidity or death, or where compensation is due for an employment related dispute.
Q: Are there any pitfalls I should avoid?
A: Yes, if you have been paid a lump sum you may not be eligible to receive Newstart Allowance for some time so it’s important that you set aside funds for any bills or everyday expenses during this time so that you don’t spend your payment all at once.
The redundancy may also affect some allowances. If you receive Family Tax Benefit, Childcare Benefit or are in line to receive Parenting Payment and/or Newborn Supplement and Newborn Upfront Payment you should check how these might be affected by the redundancy.
The redundancy may affect the amount of repayment you have to make if you have a HECS/HELP debt. It’s important to check if this is the case before you take the redundancy. No one wants to get a nasty surprise after the fact courtesy of the ATO.
Sometimes a redundancy can affect your situation if you have no private health insurance. Components of the redundancy may be included in your assessable income for the purposes of calculating the Medicare levy surcharge. Again, it’s important to check with your financial planner to see if this is the case.
Q: Where can I get help with my finances?
A: If you have more questions, or would simply feel more comfortable speaking to an expert, why not make a complimentary, obligation free initial appointment with a Bridges Financial Planner?
If you’ve got further questions about redundancy, leave them in the comments below and we’ll answer them as soon as we can to put your mind at rest.
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Bridges Financial Services Pty Limited (Bridges). ABN 60 003 474 977. ASX Participant. AFSL No 240837. Part of the IOOF group. This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner or registered tax agent. In referring customers to Bridges, the Greater Building Society does not accept responsibility for any acts, omissions or advice of Bridges and its authorised representatives.