Managing redundancy

Redundancy has become a familiar part of Australian working life. During the year to February 2013, 218,000 Australians were retrenched or lost their job when their employer went out of business.¹ And with governments around the country tightening their belts, and the global economy still in the doldrums, there’s every possibility that the trend will continue.

Here are tips to help you protect yourself financially in the event of redundancy.

What are you entitled to?

If your job is no longer available and you are under 65, you may receive a redundancy payout and an employment termination payment (ETP), along with payments for any unused annual or long service leave.

The good news is that genuine redundancy payments may be partly tax free, depending on your situation. In the 2013–14 financial year, the tax free component is $9,246, plus $4,624 for each full year you worked for your employer. Anything left over is treated as an ETP and taxed.

If you’ve been made redundant or you think you’re at risk of redundancy, check your employer’s redundancy policy and your employment contract to make sure you get everything you’re entitled to. If in doubt, consult your tax adviser or financial planner.

Putting your payout to work

A redundancy payout can be an opportunity to boost your retirement savings by making extra personal contributions into super. Under current rules, people under 65 can contribute $150,000 each year or up to $450,000 in total over three years. But while contributing to super can be a great strategy, be careful not to lock up money you’ll need to live on while you’re looking for work or waiting to access your super.

If you plan to apply for a Newstart allowance, remember there’s a waiting period based on the size of your redundancy payment. While Centrelink makes allowances for unavoidable spending like medical expenses, they won’t reduce the waiting period just because you’ve used your redundancy payout for your super. That’s another good reason to consider keeping money at call.

Taking care of your super

If your super is in an employer sponsored fund, you may be automatically transferred to a personal plan. Personal accounts often have higher fees than employer funds, so check the investment option to make sure it suits your needs.

If you’d like to switch to another fund and you have more than one account, it could be an opportunity to save on fees by consolidating them into a single account paying one set of fees — and avoid losing touch with your super in the future. Of course, it’s important to consider any consequences, such as exit fees or loss of insurance held, before making any changes to your super.

Don’t skimp on your insurance

If you have income protection insurance, check your policy to see if it covers you for involuntary redundancy. If it does, you could be eligible for regular payments while you’re job-hunting. If you’re still working but you think you’re at risk of being made redundant in the future, this could be a good time to take out a policy with redundancy cover.

While money may be tight if you’re between jobs, it’s important not to let go of essential protections like insurance, leaving you and your loved ones at risk. One money-saving option might be taking out life insurance through your super, rather than paying for it directly out of your savings.

Transition to retirement

If you’re 55 or over and you’re ready to slow down, a redundancy could be an ideal opportunity to start a transition to retirement (TTR) pension. Your pension can help cover costs while you look for another job, or give you the financial freedom to go part-time without compromising your lifestyle.

With a TTR pension, you can earn a regular, tax-advantaged income from your super, and once returned to work, can continue to build your retirement savings through salary sacrifice, potentially lowering your tax bill even further. Depending on your situation, that could help you ramp up your super without affecting your take-home pay. But you do need to check the numbers carefully to be sure it’s the right strategy for you, so seek appropriate financial advice before you act.

1 Australian Bureau of Statistics, Labour Force Mobility, February 2013, Release 6209.0.