Redundancy: 9 key issues   

HAS your role been made redundant or do you suspect it may happen? Perhaps you have friends or colleagues facing redundancy?

Redundancy can be a very stressful time for you and your family. It is not an easy thing to sort through and it is important to understand how you can manage a redundancy payment so you can make the most of it. Here are 9 key issues to consider:

It is important to have someone check your employer's calculations to ensure you are being paid the correct amount. Make sure all your relevant years of service have been included and the payment is consistent with your company's stated redundancy policy or your contract.

You are likely to receive a tax-free amount, depending on your years of completed service, as well as a taxable amount, which is referred to as an employment termination payment (ETP). You are also entitled to work out your notice period or be offered pay in lieu of notice and this amount should be included in your ETP. Different tax rates apply to an ETP and depend on whether they are subject to transitional or standard rules.

This is a complex area and it is wise to speak to a financial adviser as early as possible to make sure you are receiving all the benefits you are entitled to.

Your package will probably contain other payments besides the redundancy payment. The most common payments are unused annual leave and unused long service leave. The tax on these components varies according to certain dates and definitions which are too complicated to list here.

Again, it's worthwhile to get the figures checked out by your accountant or adviser.

Part of your payout may be tax-free. In the 2011-12 financial year, the tax-free amount of a genuine redundancy payout is defined as the first $8435 received plus $4218 for every year of completed service.

Any standard redundancy payments exceeding this are described as and are subject to different tax rates when cashed out. Note that you can only take your standard ETP amount in cash.

If you are eligible for the transitional rules, where your ETP is paid due to an entitlement in a contract, law or workplace agreement that was made before May 10, 2006, you can take the money as cash or direct the money to your super fund until June 30, 2012. If you are eligible, it is important to check the benefits of cashing out compared to directing your ETP to super with a financial adviser.

It's tempting to view a redundancy payout as an opportunity to have a holiday or pay off some debts. Before doing so, you need to make sure you can cover your living expenses for the next few months until you find a new job.

You need to assess how much money you need to live on and how much you will be able to put aside from your payout. We are currently assisting clients with cash flow planning to identify the money to be accessible and the money they can use for other purposes – like repaying debt or investing.

You may wish or need to transfer your super from your employer fund to a personal fund. It's important to compare features as well as fees and charges and to ensure you don't give away valuable insurance benefits (see more below).

You may want to access your super. However, for most people, you will only be able to do this if you have some non-preserved benefits. And while this may be tempting, you could lose up to 21.5% of your benefit in tax.

For people who have reached preservation age or met another condition of release, access to super monies may be possible if required to help you meet living expenses – though you need to be mindful of tax and the impact on your long-term income needs.

It's important not to forget about your insurance policies when changing employment. Ask your super fund or employer about continuation options on existing insurance cover. This allows you to transfer insurance policies into your own name, which is particularly beneficial for anyone who has had illnesses or injuries that could exclude them from insurance cover.

Also, if you have insurance cover through your employer super fund, check if you can continue your cover or potentially transfer your cover to a new super fund before you change super providers. 

If you are fortunate enough to participate in an employee share scheme, you may have share options which you can exercise. The proceeds could be a helpful to way to provide a buffer or reduce debt.

From a redundancy payment, if you have surplus cash beyond your living expense needs, then you will most likely be asking yourself how best to use your lump sum.

The answer will be different for each individual depending on their circumstances. Here are just a few general points to consider.

If you have a home loan, then you may wish to establish a mortgage offset account. This can be an excellent way of reducing your loan interest payments while still being able to access the money.

If you have credit card or personal loan debts, it's likely the interest rates are higher than home loan rates. It makes sense to pay off the most costly ones first.

Even if you are an aggressive investor by nature, using the proceeds to have a flutter on the share market can be a risky move. If markets go the wrong way and you are out of work for longer than you imagined, you could struggle to make ends meet.

You may wish to apply for Centrelink benefits such as the Newstart allowance. If you are eligible you may be required to serve a waiting period equal to the number of weeks in your redundancy amount before receiving your first payment. Speak to a financial adviser to find out more, or contact your local Centrelink office.

This article was provided by Multiforte.