Depending on your situation, a redundancy can be a bonus, a gut-wrenching shock – or both. In grieving for your old job or planning for your future, it can be tempting to let the financial admin slide, but your redundancy payment will play an important role in keeping you afloat while you look for a job and can make a significant difference to your financial future.
While you don’t need to make any big decisions immediately, it’s important that you spend some time checking your payment and making sure you’re receiving what you’re entitled to. It’s also worth starting to think about what your future might look like, and how you can most effectively use your payout to support that.
Receiving your redundancy payment can sometimes feel like you’ve won the lottery – but it’s worth taking the time to plan out how you can use your lump sum most effectively, as well as identifying opportunities to keep your finances on track while you’re looking for a job.
The exact approach you take in managing your payment will generally depend on your financial situation and how quickly you find a job, but it can be a good idea to sit down with a financial adviser to find the right strategy for your goals and needs.
One simple way to stretch your payout further is to ensure that you’re not paying unnecessary taxes.
As long as the redundancy is genuine, redundancy payments are tax-free to $10,989 in 2020–21, plus $5,496 for each complete year of service. However, Matthew Litchfield, Associate Financial Adviser, suggests that it’s worthwhile speaking to a tax accountant about how you can minimise any additional tax obligations from the lump sum payment.
“For example, you could make a concessional contribution to your super fund, which will reduce your tax obligations,” Matthew says.
“Another option could be asking that the redundancy payout is pushed until a new financial year, if that’s not far away, which could have tax advantages,” he says.
If you’ve got annual leave owed to you, you could also consider taking the leave before you receive your final payment. This means that you will receive super contributions during this period, which has long-term benefits.
It’s a simple question to ask your employer, Matthew points out, and they may be happy to oblige as part of your severance agreement.
A redundancy payout can be a great opportunity to set yourself up in life.
“This is a great time to consider how the funds you’ve received could be used to open new opportunities up to you,” Matthew says.
The decisions you make on how to use the funds will depend on your stage in life, but they could boost your next career move, allow you to undertake further study or help you to transition into retirement.
Being made redundant can be a tough time but viewing the experience as a speed bump in your career can help you get back on track, Matthew says.
Matthew also recommends that your debts should be top of mind when planning out how you’ll use your redundancy payment.
“If you’re taking a new job, once you’re ensconced in a new role, it’s time to pay down some debt, starting with any credit-card debt and mortgage repayments,” he says.
“Once you’ve done that, you could also make an investment in superannuation, subject to the contribution caps, or consider whether it’s wise to contemplate investments outside of super,” he says.
While redundancy can be challenging, your payout can give you a financial boost in the right direction. Matthew’s top advice? Don’t make any hasty decisions and get financial advice.