Budgeting

The unfortunate likelihood of a jobs recession driven by a slump in retail spending, a weak housing market and a lacklustre economy spells redundancies for all sorts of workers.

Bad news though redundancy is, it will be worse if employees stunned by a sudden redundancy fail to check payouts and leave a job without all the entitlements they are due.

A complicated beast

A redundancy package is actually a complicated beast – not just one big lump of money – so it’s important to make sure it’s correct before accepting a final payout. If you fail to do so, you may not just get less cash than is your right – you may also pay unnecessary tax.

Then there is the issue of what to do with a large lump sum that suddenly comes your way. For some, a sizeable payout could be a bit like a lottery win: an opportunity to pay off the mortgage or take a luxury holiday before embarking on a new career.

But depending on one’s age and occupation, being laid off can be extremely stressful and the payout may need to be handled carefully to ensure it lasts until another job is found or alternative plans, such as early retirement, are in place.

Here’s a step-by-step guide to making redundancy as smooth as possible:

Check your rights

The first thing anyone being made redundant should check thoroughly is that normal entitlements, such as annual and long-service leave, are handled correctly, says founding partner of Matthews Steer Chartered Accountants Geoff Steer.

More than seven years’ service at the one employer entitles a person to pro-rata long-service leave. Then there is sick leave (if applicable) and any accumulated rostered days off to be paid.

Anyone covered by an industrial award or employment agreement can check those documents for details. Unions should also be able to provide information.

Professional help

People not covered by such arrangements should check their contract of employment and the rights guaranteed by industrial relations laws – seek help from a professional such as a financial adviser, accountant or lawyer if you can’t work it all out yourself.

If your redundancy is sudden, make sure you’re paid the balance of the required notice period – Steer says national employment standards specify minimum entitlements and require redundancy pay if a business employs 15 or more staff.

If there is anything in the agreement about helping to pay for job search or counselling services, do take up the offer.

Monitor super

Superannuation contributions can be tricky to track but it is important to make sure they are all there if you lose your job. Also check your final super payments have been made, particularly if you are salary sacrificing.

If your employer pays compulsory contributions to funds only once a quarter, you may need to check several months down the track that a final contribution has been paid.

Multiforte Financial Services director and financial adviser Kate McCallum warns that if super is transferred out of an employer’s fund into a fund of your choice fees and changes might be higher – so choose a new fund carefully.

Don’t forget the insurance

Valuable benefits such as income protection insurance and death benefits for family are common in employer super funds so don’t throw them away moving to a fund that doesn’t offer cover.

“As people get older they may be precluded from getting insurance cover for certain illnesses so existing policies can be very valuable,” McCallum says.

She says insurance cover through an employer super fund may be able to be continued or transferred to a new super fund, but it is worth checking before you change super providers.

Work out tax

A partner at accounting firm HLB Mann Judd, Jonathan Philpot, says a redundancy payment is usually broken up into categories to determine tax. Accrued annual and long-service leave are taxed at a maximum rate of 31.5 per cent (as at January 2012).

Payment for an actual redundancy tends to be based on years of service. Philpot says the first $8435 payment plus $4218 for each completed year of service is tax free. Someone who has worked with an organisation for 25 years, for example, would not pay tax on the first $113,885 of their redundancy payment.

Check the conditions

While the remaining portion of the redundancy payment – a portion known as an eligible termination payment – is subject to tax, that tax varies according to age and whether you are entitled to contribute part of a payout to super. Since July 1, 2007, only employees who have an employee contract or agreement in place as at May 29, 2006 and also satisfy certain conditions have been allowed to roll part of a payout into super.

But from July 1 2012, this will no longer be possible. Standard eligible termination payments must be taken in cash after that date. Any contributions to super made from a redundancy payment will generally get no tax concessions from then onwards.

Spend wisely

While the temptation may be to jump on the next plane to a tropical island or buy the latest model car you have always wanted, try to resist.

There is no hurry to spend or invest a termination payment, says Prescott Securities financial adviser Matthew Kerrish.

“Unless you have another job lined up or plan to permanently retire from the workforce, you won’t know when you may need access to cash. It is important to ensure financial arrangements are flexible until you make a final decision about your future,” Kerrish says.

Work out how much money you need each week to calculate how long a payout will cover living expenses before even thinking of locking any of it away.

Keep some cash

Kerrish recommends keeping at least one year’s living expenses in a readily accessible cash fund if your payout is sufficient to do so.

“Cash funds can earn 4 per cent to 5 per cent interest, allowing you some breathing space to consider your options and providing access to the funds if necessary.

“Alternatively, some people may be able to deposit their payment into a mortgage offset account and receive the benefit of reduced interest while still having access to the funds,” he says

Clearing debts should be high on the agenda, particularly those where interest is not tax deductible such as high-interest credit card debts and home mortgages.

Think before doing the obvious ...

But the decision to repay debt needs to take into account the ability to fund your lifestyle when you may have little or no income.

“If your termination payment is used to pay off your home loan, this may leave you strapped for cash to pay for everyday expenses if you are unemployed for an extended period. You will also be unable to access redraw facilities once loans have been repaid and closed off,” says Kerrish.

The same logic should be applied to making a big contribution to super.

Philpot says the tax concessions on earnings generated by a super fund, as well as private pensions, may mean it makes sense for someone who wants to retire to use a payout to boost their super balance.

Less than five years to go?

However, anyone with less than five years to retirement should first consider their alternative income, work and lifestyle options.

“For most people it is a shock to be told they are finishing work. In most cases they would be better off keeping the money they get in their own name until the situation settles down and they know what their future is going to be,” says Philpot.

Putting your money into superannuation and then withdrawing it before you turn 60 could mean the loss of tax benefits you would get if you kept it there until retirement.

Don’t be duped

Businesses are entitled to terminate employment on the grounds of redundancy but they must not use it as a way to manage misconduct or poor performance, says workplace relations lawyer Clare Raimondo, from Kelly & Co.

“If an employer decides that a particular job is no longer necessary, or that operations would be more efficient if the job was divided up between other employees, they can make the position redundant,” she says.

Under these circumstances, employees are entitled to receive a period of notice in order to search for new employment.

The redundancy payment recognises service and compensates employees for the loss of entitlements they can’t take to a new employer.

Generous entitlements

While legislation stipulates minimum standards, redundancy payments can be much more generous depending on what entitlements have been negotiated at a workplace and could be anything from a few weeks to over a year’s pay.

Raimondo says genuine redundancy is a so-called no-fault termination.

“If an employee believes the redundancy of their position and the termination of their employment was conduct- or performance-based, or if they were not adequately consulted about the redundancy, they may have unfair dismissal rights,” Raimondo says.

“Employers are also legally obliged to determine if there are suitable alternative positions available for the employee within the company or its related entities before terminating their employment. If this has not taken place, employees may be able to challenge their termination.”

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