A guide to voluntary redundancy
Have you been offered voluntary redundancy but are unsure whether to take it? It’s a tough decision and one not to be taken lightly. Here’s some things to consider.
The offer of voluntary redundancy can be enticing, especially when you’ve been working at the company for a number of years and are looking to retire. A large sum of money and the prospect of a hard-earned break is music to many people’s ears, but it’s not always the best way forward.
When is it a good idea to take the money and go? What if you don’t find work again? Or, are you looking to retire and a lump sum payment is the sweetener to doing it sooner? There are also a few considerations to factor in when looking at the lump sum payment, such as take-home amount, type of payment and after-tax amount.
Wealth management firm BT Financial Group said people looking to take a voluntary redundancy should ask themselves these questions.
How much will I get in my hand?
Start by setting up a table or if you’re a whiz with Microsoft Excel, a spreadsheet, comprising of four columns with sub-titles: type of payment, before tax amount, tax taken out and after tax amount. You can then take a look at the section down the bottom called, Types of redundancy payments and tax treatment, to get a clearer idea of the different payments you may receive and the tax involved with each.
How long will it take me to find another job?
If you’re not ready to retire, ask yourself the time it may take to find a new job. There’s also the consideration that while laws forbid it, age discrimination still exists. Unfortunately, it may take you a little longer to secure a job you want if you’re over 60.
Do I want a change of career?
If you have already decided your current career path has come to an end, a voluntary redundancy may provide a golden opportunity to keep an income while training and breaking into a new career.
Am I ready to start looking for another job?
The thought of not having to set the alarm and face the traffic is very appealing when you’re working. Once you have slept on it for a week or two, however, you start to think about the things you miss about working, such as the interaction with different people, the satisfaction of having a purpose and the fact that you don’t have to hunt for another job. Make sure you’re ready to dust off the resume, brush up on your interview skills, let the world know you’re looking for your next opportunity and get the skills and qualifications you need to land your dream job.
Am I financially ready to retire?
If you’re thinking about retiring, add your total assets, including the amount you’ve worked out in your spreadsheet, your super and any investments. Divide that number by 20 and that will give you the amount you can expect to receive as retirement income (assuming a 5 per cent income return). Be mindful that if you were born after 1952, you will not qualify for a Centrelink age pension until at least six months after you turn 65. Those born after 1957 won’t qualify until you reach 67. It’s a good idea to speak to a financial adviser at this point to maximise your Centrelink age pension, minimise your tax and get the right investment mix for you.
Types of redundancy payments and tax treatment
Genuine redundancy payment: This is your redundancy payment if you’re under 65, which usually includes a base amount and an amount for each year of service. When it comes to tax, the first $9,246 plus an additional $4,624 for each completed year of service is tax free, the remainder is taxed as an eligible termination payment.
Eligible termination payment: This payment is above the tax free amount if you’re under 65 and your entire payment if you’re over 65. For tax, if you’re under 55 the amount under $180,000 is taxed at a maximum rate of 30 per cent and any amount over that is taxed at 45 per cent. If you’re 55 or older, the amount up to $180,000 is taxed at a maximum rate of 15% and the balance is taxed at 45 per cent.
Accrued annual leave or sick leave: This is leave pay that you’ve earned but haven’t taken. It’s taxed at a maximum rate of 30 per cent.
Accrued long-service leave: This is long-service leave that you’ve earned but have not taken. Generally, this is paid if you have more than five years’ service. In regards to tax, if you started your current job after 1978 the maximum tax rate is 30 per cent.
What should I do with my redundancy payment?
If you do decide to take the voluntary redundancy, there’s a few sensible options of where you could put it.
1. Set up a bank account that will pay you the same way as you’re paid now. If you’re paid monthly, set up a monthly payment into your day to day bank account equal to your after-tax monthly salary.
2. Use any money you don’t need for the next six months to pay off as much of your home loan as possible so you can afford to live on a lower salary if necessary.
3. If you’ve decided to retire and are over 60, set aside enough income for the next two months and put the rest into your super fund. Once the money is in super, start an account based pension and use it to pay yourself an income. It may pay to hire a financial planner at this point to help you through this process.