Redundancy can be a life changing experience filled with many mixed emotions.
It can offer a great opportunity to embrace the next stage in your career… or change things up completely if you’ve been considering a new profession. But it can also be unsettling if you were happy in your role and weren’t ready to move on.
The uncertainty of unemployment can feel overwhelming, but by taking control of your finances you can secure your lifestyle today and into the future.
Take the time to breathe
First things first… it is vital that you support your mental health during redundancy. Losing your job is not just a loss of income… it also dramatically changes your lifestyle. You no longer have your regular daily routine and the people you spent eight hours a day with are now absent. Being kind to yourself and taking time to acknowledge your emotions can help you bounce back from the initial shock and prepare you for the task of job hunting.
When it comes time to start looking for your next role, keep your career goals in mind. Taking the time to meet with a recruiter can help you feel confident in your abilities. Update your resume and adjust it according to the position you are applying for… highlighting your skills that align with the role. Draw on your experience and remind yourself that your redundancy wasn’t personal.
Redundancy payment calculations
When it comes to your severance, it’s important that you have a clear understanding of how your redundancy payment is made up. There are different components that are likely to be combined and they may each have different applicable tax rates. For example, you should expect to receive redundancy pay as outlined by Fair Work Australia in the National Employment Standards (NES), along with payments for unused annual leave, long service leave or unworked notice period.
The initial component of your redundancy payment is calculated by the number of years you have been employed. This amount is tax free up to the limits based on your years of service. However, if you work for a small business with less than 15 employees or have been employed for less than 12 months, you may not be eligible for this portion of the payout.
Your employer might offer you an additional incentive as part of your redundancy package.
An Employer Termination Payment (ETP) can be payment in lieu of notice, or the proverbial ‘golden handshake’ and these are taxed concessionally when they are above your tax-free limit. There are caps on ETP concessional tax rates and any amount included in your payout that exceeds the caps are taxed at your usual marginal rate.
Finally, any outstanding salary, annual leave or long service leave is assessed separately from your ETP but could still be treated concessionally. The Australian Taxation Office outlines more information about applying limits and how redundancy tax is calculated.
Maintaining your super and insurances
A lapse in employment caused by redundancy could have an impact on your superannuation as you will no longer be receiving your regular employer contributions. The degree of impact depends on how long you are out of work… but any gap can cause a reduction in the overall benefits of compounding interest. If you have the capacity to utilise some of your redundancy payout to continue making personal contributions you can help maintain your super returns.
Any insurance policies that are owned within your superannuation fund should also be monitored during this time. You don’t want your life insurance, total and permanent disability or income protection to be affected by your change in circumstances. It’s worthwhile discussing your position with your superannuation provider or adviser to make sure your policies won’t be affected.
Seek help and make a plan
If your redundancy payment is a significant amount, you might feel as though you’ve hit the jackpot… but it’s important to remember that your next wage payment could be weeks, if not months away. And while the immediate gratification of a shopping spree might feel great, it can reduce the amount of time you have before you need to find a new job.
By setting a budget that outlines all your financial commitments, you can find ways to save and also assess how long you can afford to be off work. Having a clear picture of your financial position can give you peace of mind and alleviate some of the stress related to bills and other day to day expenses.
Finally, if you land your new role and you still have some redundancy money in the bank, it could be the perfect time to start building your wealth.
Establishing an investment portfolio can set you on the path to financial freedom and help secure your lifestyle well into retirement.
We know that redundancy can be an unsettling experience, but it can also present new opportunities.
To find out how we can help make the most of your redundancy payment, please contact our team today. Read more Financial Planning articles.
