Managing your finances after accepting a redundancy

If you accept a redundancy offer you may receive a number of payments including a redundancy payout and payments for unused leave in addition to your final salary. Whilst a lump sum may appear attractive, there are many things to consider to manage finances throughout a period of unemployment.

Things to consider:

Redundancy payment

If you are under age 66 and have accepted a genuine redundancy offer, part of your payments may be tax-free. For 2020/21 financial year the tax-free amount is $10,989 plus $5,496 for every complete year of employment with that employer. 

The balance is paid as an Employment Termination Payment (ETP). A portion of the ETP may also be tax-free if you started employment before July 1983. The taxable amount is then taxed at the following rates (2020/21):

* Plus Medicare if applicable

Unused leave payments

Payments for unused annual and long service leave are generally taxed at up to 30% plus Medicare.

Superannuation

Unless you have reached your preservation age, your superannuation generally remain preserved and cannot be accessed. 

If you do not need access to funds prior to retirement, you may wish to contribute some of your redundancy payments as additional contributions into your superannuation. 

If you were in the employer’s superannuation fund you may need to find a new fund to roll your superannuation into. It is important to confirm your current level of insurances within your super and ensure this is available in your new fund or can be transferred. 

It is also a good time to review your superannuation investment strategy and check that your investments match your time horizon and risk profile.

Mortgage and other debts

If your mortgage has a re-draw facility you also have the option of depositing funds into this account. This has the potential to save interest and tax, as well as reduce your assessable assets for Centrelink purposes. This option will also provide you access to your funds, when you need it. 

If your mortgage does not have a re-draw facility, you may wish to consider an offset account to also reduce your interest however, this will be treated as an assessable Centrelink asset. 

You can also speak to your lender to discuss your mortgage repayments if you need access to cashflow.

Qualifying for Centrelink benefits

If you are under pension age you qualify for JobSeeker Payment to provide income while you are looking for a new job. 

Eligibility is subject to both income and assets testing. It’s important to note the following are not assessed as assets by Centrelink:

  • Your home and improvements you make to it.
  • Your superannuation (while you are under age pension age).
  • Funds placed in a mortgage account with a re-draw facility (offset accounts are assessable).
  • It is important to consider your current and future financial situation when making plans for your redundancy funds.

The payments received may create a ‘waiting period’ during which you will not qualify for any income support from Centrelink. 

This can be a substantial period of time so you need to ensure you have access to money to meet your living expenses during this time.

Your life insurance

You may need to re-apply for health, life, trauma, TPD and/or income protection insurances if these were covered by your previous employer or superannuation fund. 

Some insurers will offer a continuation option when leaving an employer so that you do not have to undergo medical assessments to continue cover.

Considerations on re-entering the workforce:

Superannuation

All of your superannuation should be invested to generate returns that match your investment timeframe. You need to consider which asset allocation and investments will help you to do that.

Wealth and retirement planning

You should seek financial advice to determine the best way to get your savings back on track and how much you should be contributing to superannuation and other investments to achieve your wealth and retirement objectives. 

Mortgage and other debts

Once you are re-employed you may be able to afford to use surplus funds to repay all or some of your mortgage and other debts. This could save you a significant amount in interest repayments, and free up salary to fund other investment strategies.

 

Disclaimer: This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, AFSL 234459. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. AUPFS is a registered tax (financial) adviser and any reference to tax advice contained in this document is incidental to the general financial advice it may contain. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product and we make no guarantees regarding future performance or in relation to any particular outcome. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. 

Published: July 2020 © Copyright 2020