Turn an unexpected event into an expected opportunity.
How do you know how much you will get?
Your employer should provide you with a redundancy estimate prior to you agreeing to sign the terms of a redundancy.
It is wise to look back at your employment contract to cross check any entitlements that were mentioned regarding the event of a redundancy being made. Secondly, if you are employed under an award or enterprise agreement, the details of a redundancy will be included there. Fair Work Australia has a list of Public Sector and Enterprise awards. If you are a member of a union, the member services arm will be able to provide guidance as well.
Can you negotiate the amount, or do you have to take what is offered?
The statutory requirements of a redundancy such as annual leave, long-service leave, sick leave and conditions that may be linked to an employment award or employment contract cannot be negotiated.
However, do you have a unique knowledge about the company’s intellectual property? Were you a key person in client or supplier relationship? This may put you in a position to potentially negotiate a gratuity or ‘golden handshake’.
How is a redundancy payment taxed?
The ATO has a good summary of how a redundancy is taxed.
It is important to consult with an accountant as to what you have been offered in your redundancy as certain redundancy payments may be tax-free up to a limit based on the number of years you have worked.
What should you do with the money?
- Prepare for a period of unemployment
When was the last time you completed a household budget? Use a proper budget tracking tool such as MyProsperity (which we use with our clients at CreationWealth). This will help you understand where you spend your money. Once you know exactly where you spend your money it will help you prioritise what you may be able to reduce in the short-term whilst you look for a new job. In the current COVID environment, this may take some time.
Once you have an idea of what your core expenses will be whilst you are looking for work, it will give a guide as to how long you can survive without an income coming through the door. It also helps to manage stress by giving some understanding that you may have 3 to 6 months of living expenses covered from your redundancy.
- Pay for proper Career Advice
Many people want to ‘get through’ their redundancy and fast forward to the other side in another job as quickly as possible. Those who take a moment to stop and reflect realise that role redundancy offers a rare opportunity to really think about what they want the next phase of their life to look like.
Get some proper career coaching. When a client informs me that they are being made redundant, I always ask if their current employer is going to provide some outplacement service/career coaching to help them find a new job. Good employers who are even letting their staff go, will pay for this service. If it is not being provided, I encourage my clients to seek their own professional help.
I have referred my clients to Christopher Paterson and his team at Alchemy Career Management for career coaching. Christopher shared an interesting fact with me recently. When his team first engage with a client, 72% of clients assume they are going to race back into the same job in the same or similar industry. After their coaching program, this drops to 35%, with 40% choosing to make a change in role or industry and 1 in 4 making a complete life change.
- New job. Time for a new financial plan.
Once you have a new job, it is time to get a new financial plan. A redundancy payout may then present the opportunity to reduce some non-deductible home debt, make some additional contributions to superannuation or purchase some assets such as shares or form part of a deposit to purchase an investment property. However, it is important that you time your considerations for longer-term commitments with the proceeds from your redundancy once you have secured a new job.
Can you still claim Centrelink benefits while you’re looking for a job?
If you are in the unfortunate situation of being made redundant, you may be eligible for the Job Seeker Payment.
What does it mean for your super and insurance in super?
Any taxable portion of a redundancy payment will be added on top of any income that you have received in that financial year. This may tip you over the next threshold to pay a higher marginal tax rate.
With the right advice from a financial adviser, a redundancy may present an opportunity to make an additional concessional contribution to your superannuation. Concessional contributions are taxed at 15%. Therefore, it may present a tax saving compared to paying your marginal tax rate on income. In recent years, law changes mean that you can hold off on deciding to make concessional contributions to superannuation until the last month of a financial year. It is possible to make a concessional contribution to superannuation from personal cash funds and still claim a deduction.
Secondly, check the policy details of any income protection insurance that you may have. Several insurers now provide a benefit that in the event of an involuntary redundancy they will waive your insurance premiums for anywhere between 1 to 3 months. Many people mistake that income protection covers you in the event of redundancy. It does not. It protects you if you cannot work due to injury or illness. Another mistake many people make is to cancel their income protection insurance after they have been made redundant. Many income protection insurance policies may still cover you for a period of up to 12 or 13 months after a redundancy; i.e. if you are unemployed and are unfortunate to have an injury or illness that prevents you from returning to work, you may still be eligible for an income protection benefit. It is important to note that each policy and insurer is different. Making a phone call to your financial adviser, insurance broker or superannuation fund will help to clarify the terms of your existing income protection policy and how it applies to redundancy.
Andrew Zbik
Senior Financial Planner
Creation Wealth
0422 038 253
andrew.zbik@creationwealth.com.au
www.creationwealth.com.au