THIS SITE IS INTENDED FOR ADVISER USE ONLY

By clicking through to the Investments or Platforms site below you confirm that you are a licensed adviser operating under an Australian Financial Services License.

Redundancy payouts: time to think smart

It’s wise to resist short-term whims and consider the longer-term, and potentially life-changing options of your windfall.

Receiving a large redundancy payout can help set you up for life, but it’s important to take a breather and seek advice before you start spending.

Being made redundant can be an emotional time for people, says Simon Lucas, a chartered accountant and certified financial planner at Perreemium Accountants and Advisers, in Melbourne.

“Until you move past that and are thinking clearly, you might make decisions you wouldn’t in the cold light of day,” he says.

With any redundancy payout, it’s important to double-check the figures, particularly the tax. A genuine redundancy payment attracts special tax treatment and the calculations can be complicated, says Lucas.

“It’s the first thing we check to make sure the client’s not being taxed too much or too little, which could be more of an issue. If they’re not taxed enough and they end up spending that money, it’s only when they put the return in that they find out they have a nasty tax bill.”

Making the money last


Obviously, how you use your redundancy payout is shaped by your stage in life and personal circumstances. For example, an experienced younger person might find another job in the same field quite easily.

“If that occurs, it effectively means redundancy is a windfall gain. You can go on a trip or pay off a debt,” says Lucas.

But, if you have been working in an industry where there are limited job prospects, you may need to use the payout to retrain. In that situation, it’s best to keep the payout accessible, perhaps in an online cash account.

“Depending on the size of the payout, you might mix that up with a term deposit to try to get a bit more interest.”

Lucas suggests opting for a term deposit with a maturity date that suits your cash flow needs.

“It’s really about managing debts and lifestyle costs, and trying to figure out how long this money is going to last.”

For most people, the first priority should be reducing personal debts, such as credit cards, loans and a mortgage.

Reducing outgoings

For most people, the first priority should be reducing personal debts, such as credit cards, loans and a mortgage.

“You want to tighten up the cash flow, which means reducing outgoings, such as repayments on loans.”

Even tax deductible debt, such as that attached to investment properties and margin loans for investing in shares or managed funds, may need to be reviewed. When you’re no longer earning a salary, that debt may not be as tax-effective.

“That becomes another topic of discussion we need to have,” says Lucas. The entire investment strategy may need to be reconsidered and some investments sold, depending on how quickly someone finds a new job.

Changing your life

For those closer to retirement age, a redundancy payout can be a ticket to a different life.

Lucas cites the case of a Melbourne man aged in his 60s who was planning to work only another five years when he was made redundant from his job. He’d been working six days a week and his payout of about $100,000 allowed him to choose to work only four days a week in a new job.

“He got the $100,000 and we reduced debt by about $40,000 and put $40,000 into super. Then we started a transition to retirement (TTR) account-based pension, so now he’s receiving $1,000 as a pension while working three to four days at his new job.”

Anyone who starts a new job after the age of 60 is entitled to start an account-based pension from their super, at a zero tax rate. But if you’ve continued in the same job past the age of 60, you’re not entitled to take advantage of an account-based pension until you’re over 65 or if you stop working before that.

Other people will see a redundancy as an opportunity to start their own business.

Lucas cautions budding entrepreneurs to carefully do their sums first to make sure there’ll be enough cash available to support them while they are building the business.

“You still have your bills to pay – rent, food – and you don’t have that dependable income coming in,” he says.

Options for younger people

For someone who is younger, who walks straight into a new job on a similar income, the most pressing issues may be to minimise tax and invest their payout well.

Lucas points to a single man in that position who used his payout to pay off his house and borrowed more than $1 million to buy another property. But his redundancy payout has left him with a big tax bill.

To reduce tax, you could consider prepaying interest for 12 months on an investment property or making a salary sacrifice contribution to super up to the maximum limit.

On the investment front, a person in the younger age bracket could direct some, or all, of their payout into growth investments, depending on their risk profile, says Lucas.

“Ideally you’d want to put this money somewhere it can grow and get a decent return over and above term deposits.”

Of course, holidays or time out are often on people’s wish lists when they are made redundant.

“If you have a passion for travel and now have the means and time to do it, consider it. But make sure it fits in with the rest of your life plan.”

Asking for help


Getting the best financial advice may help your redundancy payout go further and avoid disappointments down the track. You can find an adviser here.
 

Disclaimer
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36.