Finding out you are going to be made redundant can be a challenging time. After the initial shock, it’s common for people to begin spiralling down a rabbit hole of questions.
Here we hope to address many of the questions related to the financial aspects of a redundancy, as well as how to manage your redundancy payment effectively to maintain financial security.
Understanding redundancy payments
A redundancy payment is not just a single payment; it’s a package that often includes several components designed to cushion the financial blow of losing your job. Here’s what typically makes up a redundancy payment:
- Severance Pay: This is a payment based on the length of your employment and is meant to compensate for job loss.
- Accrued Leave Payout: Any accrued annual or long service leave that gets paid out.
- Bonuses and Additional Compensation: You might also receive performance bonuses or other compensations depending on your contract.
Understanding how much you are entitled to under these components is essential as, collectively, they will form the financial buffer that will help you transition smoothly during this period.
How will my redundancy payment be taxed?
In Australia, redundancy payments are given special tax considerations. They are tax-free up to a certain limit, which is determined by factors including your years of service.
For 2024-25, the tax-free component is $12,524, plus $6,264 for each completed year of service.
Payments above your tax-free limit will be taxed as an employment termination payment (ETP) at a rate of:
- 17% on the first $245,000 if you have reached preservation age (60 years old and older but under the age pension age of 67)
- 32% on the first $245,000 if you have not reached preservation age
- Anything above the $245,000 cap is taxed at the top marginal rate of 45 per cent, plus the Medicare levy.
If you are above the preservation age, certain tax advantages apply, potentially reducing the amount of tax you owe. To minimise the tax paid on your redundancy, consider:
- Investing in Superannuation: You can contribute part of your redundancy pay to your super fund, which might reduce your taxable income.
- Seeking Professional Advice: A financial advisor can provide tailored strategies to manage potential tax liabilities efficiently.
Where do I start?
Before you start planning what to do with your redundancy payment, it’s crucial that you do a financial health check. It’s worth thinking about the amount you need to get through the next period, and how you can most effectively use your payout to support that.
Start by reviewing your savings and debts. Establish what you have in reserves and what you owe. This assessment will provide a clear picture of your current financial position.
Redundancy might mean a temporary loss of income. So, you may need to cut non-essential expenses and find ways to reduce monthly expenditures. If you don’t have a household budget, this is the time to create one! Because you won’t be able to safely plan for the next period without clearly knowing what your basic living expenses are. You can find a number of helpful resources, such as a budget planner and an expense tracker, on our resources page.
Smart ways to use your redundancy payment
- Emergency Fund: Prioritise setting aside part of your redundancy into an emergency fund, which can cover about six months of living expenses. There are savings accounts and cash management accounts you could use that allow you to earn additional interest.
- Paying Off Debt or Mortgage: If you have high-interest debt, consider using part of your payment to reduce or clear it. This reduces your monthly financial burden and avoids incurring more interest.
- Investing: Investing some of your redundancy into wealth-generating tactics such as stocks, bonds, or real estate could see returns in the future. Make sure to assess the risk and your long-term financial goals.
- Education and Training: Use this time and financial cushion to upgrade your skills or redirect your career. Courses and professional certifications could open new job opportunities.
- Seeking Financial Advice: A financial advisor can help you make the most of your redundancy payment by creating a personalised and comprehensive financial plan that will let you confidently prepare for your living expenses and explore investment opportunities.
- Psychological and Emotional Considerations: Dealing with redundancy can be stressful. You may need to seek support from counselling services to help manage the emotional aspects so it’s wise to ensure you allow for this when allocating funds.
Important things to consider when going through a redundancy
- Plan for Unemployment: Prepare for a longer-than-expected period without employment. This way the funds are there if you need them and can be used for other opportunities if you don’t.
- Retirement Planning Adjustments: Consider how your redundancy impacts your retirement plans. You might need to adjust your savings strategy to stay on track.
Effectively managing your redundancy payment is key to ensuring that it serves as a stepping stone rather than a setback. By understanding your payment’s components, assessing your financial health, and strategically planning its use, you can set yourself up for financial stability and success.
Feeling unsure about how to handle your redundancy payment? Contact Green Associates today and let’s chat through how you can navigate this challenging but manageable phase.
