TERMINATION AND REDUNDANCY
The collapse of Ansett and its associated industries, and now the job slashing in other companies, means that many Australians are facing retrenchment or redundancy. It can be one of the most trying periods in a person's life, but making wise financial choices can help to ease the pain.
First, resist the temptation to cash in the whole termination payment, pay off all your debts, and put the rest in the bank. This might be a natural reaction, but it could result in your losing valuable superannuation concessions as well as paying a lot of unnecessary tax. You should be trying to keep your financial situation as flexible as possible, while ensuring you maintain your tax benefits.
Don't repay more than three month's payments off your loans. It is important to keep funds on hand for living expenses, and when you do find another job your age may preclude you from getting a fresh loan on the terms you enjoy at the moment. If you have investment loans leave these as "interest only", so you don't lose the tax benefits when you work again.
Realise that you need expert advice. The laws regarding superannuation and redundancy payments are complex, and the wrong move could cost you dearly. With your adviser, decide which components of your termination payment can be added to your superannuation (rolled over), and then discuss the best investment strategy for your risk profile. Bear in mind that your money may be there for 20 years or more so don't be frightened to have a substantial percentage of your money in growth assets.
Possibly you will have a housing loan and will be wondering whether you should cash in your termination payment to pay it off. This is usually not the best strategy - for starters, you may find a large portion of the payment is "preserved" (inaccessible until you retire) and thus cannot be redeemed, but in any event experience tells us that lump sums once dissipated are almost impossible to replace. Your termination payment is meant to help pay for your retirement and should be kept for this purpose. A further disincentive is the exit tax which may be as high as 21.5%.
CASE STUDY
Tony, age 40 received a termination payment of $95,000 and decided to cash it in to pay off his house mortgage. His loan was $75,000 and after paying exit tax of 21.5% on his superannuation payment, he received just enough to pay the loan out. His payments had been $500 a month but somehow he never got around to investing them after the loan was discharged. His termination payment was never replaced.
In contrast Marie, also age 40, had a similar size home loan but understood that $500 a month in loan repayments was cheaper than rent and therefore decided to keep the loan and struggle to pay it. She rolled over her $95 000 superannuation payout and so escaped the 21.5% exit tax, which meant she kept the whole sum working for her. She chose an equity based rollover fund, which averaged 9% per annum until she retired at age 60. It was then worth $570 000 and it became the foundation of her allocated pension.
Is there ever a case for taking the money? Remember that a redundancy payment contains a tax free portion which is calculated at $5295 plus $2531 for each year of service. This means a person with 10 years service is entitled to $30 605 tax-free. As this is tax free there is obviously no exit tax and it is also non-preserved so it can be withdrawn straight away. It could be used to reduce a housing loan, provided the original payments were maintained. But human nature being what it is it is usually better to invest it.
Even if you feel your job is secure, the unexpected job losses are a grim reminder that we should all try to put safety buffers in place to protect our precious assets. Ways to do this include getting well ahead in your loan repayments if appropriate, making sure you have enough insurance, and ensuring that your assets are protected if you are in a position where you may get sued.
A good rule of thumb is to try to maintain your home loan repayments at $12 per $1,000 per month (eg. $1,200 a month on a $100,000 loan). This will reduce the term to less than ten years and save you a huge sum in non-deductible interest. It also gives you breathing space if you suffer a financial setback such as retrenchment. A financial adviser or life agent will be able to assist you with insurance but bear in mind it is almost certainly cheaper to pay your life insurance out of your superannuation. If you make the contributions by salary sacrifice you will find that the contributions are coming from pre tax dollars.
If you wish to protect your assets there are a number of strategies available. These include vehicles such as superannuation and insurance bonds, and also holding assets in the names of other family members.
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