Navigating redundancy

Even though redundancy is often part of business life, being made redundant towards the end of your career can throw retirement plans into disarray, especially if you were counting on working longer in the same job.

The key to coping with being made redundant, according to Philip Taaffe, Principle Adviser at Aptium Financial Services, is to avoid panicking.

"In many cases people discover that a redundancy at this stage in life can open doors to new financial and lifestyle opportunities" says Taaffe. He advises that this is reliant on taking the right steps to understand your options, and avoiding potential pitfalls as you navigate the process.

“You need to immediately be asking ‘From a financial point of view, is this a threat or an opportunity?’,” Taaffe says.

“While every situation is different, it could be a positive thing that can be turned to your favour.

“It may not have been exactly what you wanted or the timing you wanted but, if you look at what you’ll end up with, it could become a bit of a windfall.”

For many people, he adds, once they’re used to the idea, "unexpected redundancy becomes a positive. They’re able to take advantage of it to achieve goals and objectives they might have been talking about for years”.

A redundancy package can be complex with a range of tax implications – especially if it covers a long period of employment or is a large sum. One of the first steps to take is to ensure you completely understand the offer.

“Knowing your rights, checking if you’re receiving your correct entitlement, is important,” Taaffe says.

“As soon as possible, get a copy of the proposed payout. Without that, you don’t really know where you stand.

"You’d want to double-check the figures from the employer looking at whether various components of the payments are correct. For example, the tax on lump sum payments varies depending on years of service; different periods of unused leave entitlements are taxed at different rates.”

You can check your legal entitlements and use the government's Fairwork redundancy calculator before you speak to a financial consultant.

Communicate with your employer

Once you understand the offer, you may be able to identify opportunities to enhance the final sum. This can be done by minimising the tax on redundancy or boosting superannuation amounts, for example.

“If your employer is a bit flexible, you might be able to use it to your financial benefit,” Taaffe says.

“With annual leave or long service leave, sometimes there are tax advantages to taking these over a period of time before the date of your redundancy – and, doing it that way, you can often receive extra super contributions on top.”

Before making any financial decisions, take time to assess your position and get some perspective on the situation. This may include seeking out professional financial advice tailored to your specific needs. It may also include carefully reviewing and revising your budgets, so you can move ahead with a clear financial strategy.

“Part of the planning process is to begin with some kind of projection to say, ‘Well, where does this leave me?’,” Taaffe says.

“If you have a lump sum, does it mean you can pay down the mortgage or are you now able to maximise your pre-tax contributions to super? Is the timing right for you to retire now or do you need to secure new employment immediately? Does it need to be at the level of your previous job or would you like to scale back? And how long can you afford to be off work without being worse off? Are you able to access your superannuation?

“A redundancy often buys people maybe six months or a year of bonus time. And if you get another job within that time frame, you could be better off.”

Taking the time now to ask questions and consider different options will help financial outcomes as well as your peace of mind, Taaffe says.

“One of the biggest mistakes people make is not getting advice early,” he reveals. “A lot of people will sit at home and worry. But confronting the situation can save a lot of angst and sleepless nights. So, if you do find yourself worse off, you can cater for it, work around it.”

For some people, redundancy in your 50s or 60s is the ideal way to begin transitioning to retirement.

“A redundancy payment can give you enough money to be able to work less,” Taaffe says.

“A large payment might allow you the financial freedom to start working less… perhaps not in your ideal job but in a transition towards retirement.”

For those with access to their superannuation, taking some of your super through a ‘transition to retirement’ product could be an option. You might, for example, be able to draw a modest amount from your super, not eating into it too significantly, while also working part-time to make up the shortfall. What is appropriate for you will depend on your specific personal circumstances.

Use the government's MoneySmart retirement calculator to work out the income you're on track for.

Finally, once the initial shock is over, redundancy can lead to new options and new ways of thinking. Some embrace the freelance life, some focus on enjoying their free time more, and some retrain in an area that’s always interested them, some getting a better job.

“Even if your earnings have been reduced,” Taaffe says, “with some careful planning you might actually be better off.”

Request a complimentary financial planning consultation

With so many options, it’s a good idea to seek help to ensure you’re investing in a way that suits you. You can talk to your financial adviser or set up an appointment with a NAB financial adviser by calling 1300 558 863 (Mon-Fri, 9am-6pm AEST/ADST).

For more information, help with your questions and general advice, call MLC on 13 26 52.