Turn redundancy into opportunity
Redundancies are a common occurrence in business life, but 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, Principal 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”.
Understand the implications
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, opens in new window 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.”
Review your options
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.”
Move towards retirement
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, opens in new window 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.”
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This information is provided by National Australia Bank Limited ABN 12 004 044 937 AFSL No. 230686 (NAB), a member of the National Australia Bank Group of companies. Any advice is general in nature and has been prepared without taking into account your personal objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to those matters. See the NAB Financial Services Guide for details about relationships between NAB and product issuers, and remuneration or benefits that may be received in relation to NAB’s authorised services. Any general tax information on this website is intended as a guide only and is based on our general understanding of taxation laws. It is not intended to be a substitute for specialised taxation advice or an assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.