Provided by Mercer: 18/11/08
In 2008, unemployment reached its lowest level for 33 years but it seems we’re in for a tougher time over the next few years.
Currently around 4.3%, forecasters expect the unemployment level to rise significantly in the next few years. If you think your job may be under threat, how should you prepare? And if redundancy does happen, how can you ensure you understand what you’re entitled to and, when you receive a redundancy payment, that you use it in the best way?
Being prepared is the best insurance
Unexpected events such as sudden illness, redundancy and unemployment can - and do - happen. However, unlike illness or disability, sudden unemployment can’t be insured against (though mortgage insurance may cover your home loan repayments for a period of time). Being financially prepared is an alternative type of insurance. Have a budget and get any debt under control. At the same time, try to save some cash so you have it in reserve.
Understanding your entitlements
Redundancy provisions vary across companies and employment contracts. If your employment is terminated you would normally be paid your unused annual leave and unused long service leave, but you may also be entitled to a further payment. As an example, this payment could equate to four weeks salary plus two weeks for every year of employment with your employer.
Redundancy payments are subject to tax:
- The unused leave portion of your redundancy is subject to tax, but is capped at 31.5%.
- Some of the redundancy payment may be tax-free – the tax-free portion is calculated as $7,350 plus $3,676 for every completed year of service.
- Any payment made in addition to the unused leave and the tax-free portion is called an Employment Termination Payment and the taxation of this depends on how much you receive, how old you are and how long you have been with your employer.
Generally, Employment Termination Payments cannot be rolled over to superannuation - but there are exceptions. You should clarify with your employer exactly what you’re entitled to and whether or not you have the option of rolling your employment termination payment over.
To illustrate the above, let’s look at Max who is 48 years old and receiving a redundancy payment after working for the same company for 20 years.
In addition to his unused leave payment, Max will also receive a payment equal to 44 weeks of salary (four weeks plus two weeks for every year worked), totalling $90,000. Of this amount, $80,870 ($7,350 plus $73,520) is calculated as his tax-free portion. The balance of $9,130 is his Employment Termination Payment and subject to tax of 31.5%, if taken in cash.
Max’s employer has told him that he is allowed to roll over his Employment Termination Payment into superannuation. If Max does so, some or all of the payment would be taxed at 15%
Optimising your redundancy payment
In deciding how best to use your redundancy payment, there are a number of options. These will depend on your financial situation and personal circumstances (for instance, how long will it take to find a new job or are you planning to retire). They include:
- Using the payment to reduce debts such as your mortgage, personal loans or credit card debts.
- Rolling over the Employment Termination Payment into superannuation, potentially saving tax. As highlighted above, the ability to do this is limited but if you can, it may be tax effective. However your access to the funds will be restricted until you reach your preservation age and retire.
- Hold on to the money as you may need to it to pay day to day living expenses until you find a new job.
It should be noted that this article deals only with financial issues and there are other parts of a redundancy package (such as outplacement services and Centrelink benefits) that should be explored fully.
Lifetime employment with one company is increasingly rare and redundancy is much more common. Many of us will be made redundant at some stage of our lives and, understandably, it’s a very worrying and uncertain time. At times like this, a financial adviser can help give you the clarity you need to make the right decision for your circumstances. Often financial advice is part of a redundancy package – make sure you take it up and speak to a licensed, or appropriately authorised, financial adviser.
More information
If you're facing redundancy and would like financial advice for your personal situation please call 1800 633 403. We can arrange for you to speak with a Mercer financial adviser.
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
