People affected by the increasing number of redundancies currently being offered in the workforce need professional advice on how to best structure their financial affairs – especially if they are likely to be unemployed for some time.
Mr Jonathan Philpot, a wealth management partner specialising in superannuation, with accountants and advisers HLB Mann Judd Sydney, said for those nearing retirement, redundancy may provide an additional boost to their savings enabling retirement to be made sooner and/or more comfortable.
“Any worker who has been employed at one place for many years is likely to receive a payout representing the largest amount of cash they have ever received at one time.
“However, it’s not like winning the lottery – care needs to be taken in how any redundancy payout is used as it may need to last for some time if the person who has lost their job can’t find another one.”
Mr Philpot said that a redundancy payment is usually broken up into a number of categories of payment. Accrued long service leave and annual leave are taxed at a maximum rate of 31.5%.
The part relating to redundancy is usually based on the number of years’ service, for example 14 weeks plus 2 weeks for every full year of service.
“A large amount of this payment is tax free, based on the first $8,435 plus $4,218 for each completed year of service. Someone that has worked with an organisation for 25 years would therefore receive the first $113,885 as a tax free payment.
“While the remaining sum of the redundancy payment is subject to tax, this will vary according to age and whether the person is entitled to the ‘transitional rules’.
“These apply to employees who have an employee contract or agreement that was in place as at 9 May 2006 and satisfies certain provisions,” Mr Philpot said.
“This portion may be eligible to be rolled into superannuation rather than taken personally, in which case income tax does not apply and the superannuation tax is only 15%.
“Such an approach has obvious attractions for those who can adopt it – as they are using a cash payout to build long term assets.”
“A good example would be where a mortgage has already been extinguished and the person being retrenched was in their early 50’s with not much in super.
“However for others depending, on how much debt is on the home and the age of those affected, a better option maybe to reduce the mortgage.
“It must also be remembered that money contributed to superannuation generally won’t be accessible until at least 55 years of age and perhaps 60, depending on date of birth, so locking away money into super prior to these ages could lead to problems if work is needed but not found.
“Future employment prospects always need to be considered, and if it is likely that finding work will be difficult, or will be on a reduced salary, then it would be prudent to keep some of the redundancy payment to assist with living expenses.
“The overriding thing for redundant workers to avoid is going on a spending spree even if they do feel in need of a holiday or retail therapy.
“Although it’s an emotional and worrying time, anyone retrenched must try to keep a realistic look at their future employment prospects before making a decision with the redundancy sum.
“A frequent mistake is to take the big dream holiday, particularly when there is personal debt. If a person could not afford this type of holiday when they were working, they should refrain now. A too optimistic outlook on the future can result in significant pain.
“Likewise, risking the redundancy payment on a speculative investment, or even deciding it is enough to start that dream business, is a high risk strategy to take.
“Overall, seeking sound financial advice at this very confusing time is often the best decision that can be made.” Mr Philpot said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For further information contact:
Jonathan Philpot – 02 9020 4196