Updated on 4 June 2019: The information contained in this article is accurate for the financial year 2019-20
If your role has been made redundant, you don't need us to tell you that it can cause a lot of emotional and financial stress. The good news is that your redundancy payment comes with financial opportunities. The bad news is how complicated the tax implications and resulting financial planning can be.
The key to making the most of your redundancy payment is to fully understand what you’re entitled to. You should also then make a considered plan with a qualified and experienced financial adviser who can help manage your payout package in the best possible way. Professional financial advice pays off because you can be significantly better off if you maximise your redundancy payout through minimising tax and getting access to any government benefits. We often see clients prosper after redundancy, because it offers a unique opportunity to reassess your financial goals and use your payout to set you up for the future.
While you're seeking advice to make a sound long-term plan, let’s look at what money you can access in the short-term. Some of these might surprise you.
1. Tax-free redundancy payment
A genuine redundancy payment is made when an employer either doesn’t need an employee’s job to be done by anyone or becomes insolvent or bankrupt. Part of the redundancy payment can be paid tax-free.
The tax-free limit consists of two elements, a base amount and an annual amount for each year of service. These are indexed annually. For 2019-20, the base amount is $10,638 and the annual service amount is $5,320. This means, for 10 years of service, the tax-free limit for the year ending 30 June 2020 is: $10,638 + ($5,320 x 10) = $10,638 + $53,200 = $63,838
Any amount over the tax-free limit is treated as an employment termination payment or ETP.
2. Employment Termination Payments (ETP)
This is a lump sum payment that will be taxed at a concessional rate, up to ETP cap amounts, at a maximum of 32% (including Medicare levy) if you are below preservation age, or 17% (including Medicare levy) if you have reached preservation age.
If you are aged 65 or over, you are not eligible for a 'genuine redundancy' payment and your entire payout will be treated as an ETP. Unused annual leave and long service leave is also taxed concessionally, up to 32% (including Medicare levy).
The ETP amount must be taken as a lump sum. While ETPs cannot be rolled into super, you can make a post-tax or non-concessional contribution to super with all or part of this amount. Before you do this, check the contribution caps and seek professional advice.
3. Centrelink payments to support your redundancy package
You may be surprised to learn that you could qualify for Centrelink benefits. This is means tested and will depend upon your level of assets (your home is not included in the assets test.) If you have received a redundancy payment there is likely to be a waiting period before any income support benefit is paid, so register with Centrelink as soon as possible after you stop receiving an income.
4. Accessing superannuation to improve cashflow following redundancy
You may be able to access some of your super depending on how it’s classified.
- Preserved super: Cannot be accessed until you’ve reached your preservation age
- Restricted non-preserved super: Can be accessed before preservation age, provided you have satisfied a condition of release (e.g. redundancy)
- Unrestricted non-preserved super: Can be accessed at any time
If you’re 60 years and over, any super withdrawn as a lump sum is tax-free. If you’re under 60, the following rates apply:
|Under preservation age||22%*|
|Preservation age to 59||
First $205,000# at 0%
Excess at 17%
|60 and over||Tax-free|
*Including Medicare levy
#This is a lifetime limit and is indexed annually. These figures are for the tax year 2019-20
It’s important to weigh the advantages of using these funds now against the disadvantages of withdrawing money from a concessionally-taxed environment.
Designing life after redundancy
While redundancy is a big upheaval, good financial advice can help you create a positive financial future. According to career transition expert, Peter George, Managing Director at Prima Careers, the most challenging phase in the early years of retirement, whether voluntary or involuntary, is adjusting to long-term lifestyle change. He says, "Initially, people may set out to accomplish all the things they've looked forward to doing with more time on their hands - travel, socialising or remodelling the house. However, once the laundry list - and maybe its resources - are exhausted, people often begin to wonder, what happens now?"
By preparing for the financial and emotional upheaval of this transition, we can be in a position to spot the lifestyle opportunities this phase can bring. As Psychologist and Career Coach, Bri Hayllar of Flourish Careers and Coaching says, "An impressive 40% of our happiness is a direct result of our choices, habits, thinking and actions. By looking for ways to actively influence your life, you can increase positivity and wellbeing." Whether you go on to start a new career, run your own business, consult on projects or do volunteer work, Bri says, "Living deliberately is the difference between whiling away time because you can't think of anything better to do, versus knowing what matters to you and taking steps to make these things part of your life."
Many of our clients found redundancy to be a turning point in their life and sometimes even a great opportunity to retire earlier than planned. We can help you do the sums to work out how to support your lifestyle now and in the years ahead.
Geoff and Fiona Freeman
I turned to Richard Dahl for advice about managing a small portfolio of shares when I was just 21 and working at Mitsubishi. When I got my first well-paid job at 23, I used his advice again to get serious about building my superannuation. My goal then was to retire at 50. I’m now 55 and semi-retired, set to retire fully next year. Richard’s advice has seen us through everything from paying off the house, to the kids’ education and making the most of a redundancy package. Our relationship with Richard has also helped cement our financial goals as a couple. The annual review meeting has kept us on track and it’s been great to see our savings and investment projections turn into reality over the years. After all the hard work and raising two independent daughters, we’ve gone full-circle and now it's time for us again.
I first met David Batchelor when I took a voluntary redundancy five years ago. David helped me move from a defined benefit scheme into a super accumulation fund and plot a path to early retirement. It was refreshing to meet a professional and knowledgeable adviser who was more interested in my needs than their own. Under David’s guidance I now have more money than when I started investing with FMD Financial, even though I’m drawing a comfortable monthly income stream. Life is short and I’m enjoying the retirement lifestyle I want with the confidence my money will last for the long haul. I've met other FMD clients at their regular events and no-one has a bad word to say about them. I'd certainly recommend David and the team to anyone facing redundancy and looking for expert financial advice.
I was a couple of years away from retiring when my job in the IT industry was made redundant. I was uncertain about the future and knew I had to be careful with my money. Seeing Jason Calleja at FMD Financial cleared the fog. He showed me how to use my payout, super and other assets to create an income that would give me the lifestyle I wanted in retirement. Now I'm busy doing the things I love - volunteering, travelling and spending time with family and friends.
I'd recommend FMD to anyone looking for advice on redundancy or retirement.
Maximising your redundancy payout
These are the two things you can do to maximise your payout and minimise your stress right now:
- Get detailed information from your employer: If you’ve been offered a redundancy package, ask your employer for an estimated eligible termination payment statement. This will give you the components of your payout which we can use to understand your tax position.
- Seek professional financial advice: An experienced, qualified financial adviser can assess your current financial situation and help you figure out how long you can afford to be without an income.
When you book a meeting with one of our financial advisers, you get a 1-hour session at no charge which will give you a deeper understanding of your finances and how to make the most of your redundancy payout and plan for the future. We can usually answer your most pressing questions and you’ll know if you could benefit from more detailed personal advice. Don't take our word for it, read about our client experiences below.
Make the most of your redundancy payout
General advice disclaimer: This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The information in this article is not intended to be comprehensive and should not be relied upon as such. In preparing this article we have not taken into account the individual objectives or circumstances of any person. Legal, financial and other professional advice should be sought prior to applying the information contained on this article to particular circumstances. FMD Financial, its officers and employees will not be liable for any loss or damage sustained by any person acting in reliance on the information contained on this article. FMD Group Pty Ltd ABN 99 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of FMD Advisory Services Pty Ltd AFSL 232977. The FMD advisers are Authorised Representatives of FMD Advisory Services Pty Ltd AFSL 232977.