Redundancy is an all too common event in the lives of many people these days. Those who experience redundancy need to cope with a lot of psychological, social and economic challenges, as they adjust to new circumstances and make decisions about future directions.
Some may see it as an opportunity to retire early, or take a hiatus from work. Others may see it as a chance to make a career change or to reduce work commitments. Still others will find that it puts them under significant financial pressure and they may need to make adjustments to their lifestyle.
The best use of a redundancy payout will vary widely from person to person and there are many options available to you, but this overview may help you gain a bird’s-eye view of the possibilities.
Understanding your redundancy payout
The lump sum payment your employer pays you upon redundancy is usually made up of a combination of a tax free component, an employment termination payment, unused annual leave, unused long service leave and outstanding salary payments. The complexity of these components and your particular financial situation means that there are a range of issues you need to consider, including:
- how your payment will be taxed
- how long before you need to return to the work force (if at all)
- how you intend to cope or adjust your basic living expenses
- what Centrelink payments you may entitled to
- how will your retirement savings be affected
So what are your choices?
To assess all these factors, it may be prudent to speak with a financial planner and a tax adviser to ensure that all the bases are covered and that tax saving opportunities are not lost. The wrong decisions could cost you real dollars so getting advice can help you understand the consequences.
In the initial stages, it may be best to deposit funds in a high interest savings account, until advice is sought and more considered decisions can be made on investment and/or spending.
Of course you may also be tempted to treat yourself with something that you otherwise would not be able to afford, such as a holiday or a new car. It may well be a valid choice for you to spend on such luxuries, but try to delay this until you have made a proper assessment.
Will you need the money for living expenses?
If you are intending to look for work and still have significant family and living costs to take care of, you may need to keep funds on hand to cover basic living expenses. Refreshing your personal budget could be a wise move so that you can identify opportunities to reduce expenses and project how long the redundancy payment will last, if it is your sole source of income.
Using the funds to reduce debt
Paying down a mortgage or other personal debts may be a valid course of action in some cases, but it will depend on the type of debt you are repaying and your wider financial situation. Generally speaking, if debt repayment is appropriate for your situation, you should only pay off non-deductible debt and high-interest credit cards and personal loans should be the priority.
Paying down some of your mortgage may also be a possibility, especially if you have an offset/redraw facility on your mortgage that allows you to save on mortgage interest without losing access to the funds. Your financial adviser will be able to recommend if debt reduction is the right strategy for you.
Topping up your super
Using redundancy funds to top up your super may be worthwhile, especially if you are approaching retirement age. With the recently tightened rules around maximum contribution limits, you need to be careful that you do not exceed limits and incur tax penalties. Your adviser can help you assess this, as well as helping you decide whether putting the funds into super is the best option for you.
Holding the funds for emergencies
If you do not already have an emergency savings fund (equivalent to, say, 3 months’ salary), then it may be worth considering setting one up with your redundancy money, rather than investing it in assets that are not easily accessible. This can give you the flexibility to take care of medical emergencies, a crisis with a family member or other pressing needs that may suddenly arise.
Investing in wealth creation
Another possible option is to invest your redundancy payout into growth assets that can boost your longer term wealth creation, such as shares, a managed fund or property. Of course tying up funds in this way will depend on your liquidity needs, age and tax position (among other factors), so see an adviser to determine whether investing the money is best for your wider financial situation.
The key with all options at redundancy is not to assume a one size fits all answer. Consult a financial adviser who can help you make balanced decision that takes all your personal factors into account.
What are your experiences with redundancy? Share your thoughts below.