Making the most of your Redundancy Payout

Facing redundancy can cause severe psychological distress, and have far-reaching financial implications. 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.

It is heartening, however, that our team of Financial Advisers have been there for a number of clients who have been made redundant, and have helped them to turn their bad situations around into opportunities.

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

According to ASIC, a redundancy payout can be made up of any of the following:

• a severance payment
• an incentive payment
• a payment in lieu of notice
• unused annual leave and long service leave.

Regardless of its makeup, in most cases you’ll get a lump sum when you finish your role. The amount of the payout will likely vary depending on how long you’ve been with your company, and will be taxed accordingly.

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:

It’s important to weigh the advantages of using these funds now against the disadvantages of withdrawing money from a concessionally-taxed environment.

While redundancy is a big upheaval, good financial advice can help you create a positive financial future. We understand that everyone’s experience is different. Not all have a happy ending, but personal financial advice that takes a holistic overview of your unique situation can make an enormous difference to your outcomes following redundancy, and other personally challenging life events – we know this to be an irrefutable fact. 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.

Sources:

https://www.fmd.com.au/insights/how-to-maximise-your-redundancy-payout/

https://www.nab.com.au/personal/life-moments/unplanned/unemployment/redundancy-finances

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Soundbridge Financial Services is an Authorise Representative of AFTA Pty Ltd ABN 18 624 984 550, an Australian Financial Services Licensee, Registered office at 166 Quay Street, Rockhampton QLD 4700

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Posted on July 10th, 2020