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 and then make a considered plan with a qualified financial adviser who can help manage your payout package in the best possible way. Let’s look at what money you can access at this time. 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 2018-19, the base amount is $10,399 and the annual service amount is $5,200. This means, for 10 years of service, the tax-free limit for the year ending 30 June 2018 is: $10,399 + ($5,200 x 10) = $10,399 + $52,000 = $62,399
Any amount over the tax-free limit is treated as an employment termination payment.
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 ETP 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 on your level of assets (your home is not included in the assets test) but it’s worth finding out. 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 15%
|60 and over||Tax-free|
*Including Medicare levy
#This is a lifetime limit and is indexed annually. These figures are for the tax year 2018-19
It’s necessary to weigh the advantages of using these funds now against the disadvantages of withdrawing money from a concessionally-taxed environment.
Embracing a new lifestyle
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 lifestyle 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.
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.
Make the most of your redundancy payout
When you book a meeting with one of our financial advisers, you get a 1-hour session 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. There's no charge for this first meeting and we can usually answer your most pressing questions and determine if you’ll benefit from more detailed personal advice. Our clients often talk about the relief they felt after seeking professional financial advice when facing redundancy. You can read their testimonials here.
This article has been prepared by FMD Financial and is intended to be a general overview of the subject matter. The article is not intended to be comprehensive and should not be relied upon as such. In preparing the 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 in the 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 in this article. FMD Group Pty Ltd ACN 103 115 591 trading as FMD Financial is a Corporate Authorised Representative of Paragem Pty Ltd AFSL 297276. The FMD advisers are Authorised Representatives of Paragem Pty Ltd AFSL No.297276.