Be smart with your redundancy payout

If you’ve recently been made redundant, there are a number of issues to consider before making any decisions about what to do with your payout.

Retain access to some of your funds

The first thing you need to do is consider how to manage your immediate commitments like mortgage repayments, living expenses and other debt repayments. Having some flexibility is critical while your job outlook looks uncertain. Investing some of your money so that you still have easy access to it may be the best way to put it to work while you find your feet.

If you have a mortgage with a redraw facility, consider parking your funds here or take advantage of a mortgage offset account. Otherwise, set up a high interest online savings account with daily access.

Do a budget and make some calls

Prepare a realistic household budget based on how long you think you’ll be out of work. This will help you make your payout last. Look for ways to cut non-essential expenditure and contact Centrelink to see if you qualify for any government assistance such as Newstart. Any entitlements will depend on your age, assets and other income. Plus, be aware that some components of your redundancy payout may delay the payment of any benefits.

Examine your debt situation

It is important that you can still manage your debt commitments while you’re unemployed. Your debt management strategy will depend on a number of factors including your tax liability, the interest rates on your loans and the performance of any existing investment products.

Reducing non-deductible debt like high interest credit cards or car loans should be your first priority. If you are worried about servicing your mortgage, then contact your bank as soon as possible to renegotiate your repayments. Alternatively, you could switch to an interest-only facility. Your bank should work with you to restructure your payments or change the length of your loan.

Get advice on potential tax issues

Redundancy payouts are not taxed the same way as regular income and the tax rules relating to them are quite complex.

At the moment you are entitled to a tax-free redundancy benefit of $7,350 plus $3,676 for each year of service with your employer. This means that if you receive a redundancy payout of $100,000 after 15 years of service, your tax free amount will be $7,350 + $55,140 ($3,676 x 15 years) = $62,490. This money can not be rolled into super but will be completely tax-free.

The balance of your payout ($37,510 in our example) is classified as your Employment Termination Payment and, depending on your circumstances you may be taxed on this. However, you may be able to roll this amount into your super.

You will also be taxed on any unused long service and annual leave.

Note: This example is provided by way of illustration only and is based on the facts given. You should not take the example as an estimate of the amount of actual tax payable in relation to a redundancy payout.

Consider your super options

Your ability to put some or all of your employment termination payment into your super will depend on how close you are to retirement, your former employment arrangements, and how long you think you will remain unemployed.

If you’re older than 55, and the law allows you to do so, you may want to invest some or all of your payment into super and retire early. With tax at only 15 per cent on any earnings, and potentially 0% if you commence a pension, investing through super is obviously more attractive than outside super where earnings are taxed at your marginal tax rate.

Also, depending, on your age and the size of your payout, you may be able to save significant amounts of tax on your employment termination payment. The downside to putting this amount into super is that you will generally not be able to access these funds until you retire.

Invest wisely

If you’re confident that you won’t need access to your redundancy payout in the short term and you are comfortable with your current superannuation strategy, then you may want to consider investing directly in shares or managed funds. The current market conditions provide an ideal opportunity to buy shares in quality companies at good prices.

For advice on how to make the most of your payment, please call us.

Important information

The advice in this article is general advice only and does not take into account your objectives, financial situation or needs. Therefore, before acting on the advice, you should consider its appropriateness to your personal circumstances. Although the information in this article was obtained from sources considered to be reliable, the information is not guaranteed to be accurate or complete. This publication was prepared by AMP Financial Planning Pty Limited ABN 89 051 208 327. The information in this article is current as at 13 March 2009 and may change over time.