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Navigating redundancy

September 2020

With projections for 10% unemployment by the end of the year, redundancy is a real concern for many. And if you feel it’s a possibility for you, here are some steps to prepare yourself.

 

How to prepare for redundancy

Being made redundant is likely to be one of the toughest challenges of your working life. It can either be forced or voluntary, the latter being where it’s your choice. In the current climate, however, it’s more likely to be one that is forced on you. Whatever you do, you shouldn’t take it personally as it is the job that is being made redundant – not the person.

Getting your finances in order is a must, says HLB Mann Judd  partner Michael Hutton. “This includes paying down debt – if you can – but paying it down in a way you can redraw on it if you need to. You should also be getting an investment strategy in place.”

Not having any income coming in could have a huge impact on your financial well-being, even if you receive a large payout, so you need to manage your money carefully. Hutton says what your strategy is will depend a lot on your age.

“You don’t want to start putting money into super if you’re not at your preservation age because it’ll be locked up until then,” he says. “However, the government is allowing people to access some of their super without penalty at this time because of COVID-19.”

Hutton says the biggest issue is often getting another job – if that’s what you want – so part of any preparation could be checking out what the situation is for jobs in your field.

“The ideal situation is being made redundant and then walking into another job,” he says. “Then you get the tax benefits of the redundancy and the income from the new job. However, in this climate, the danger is you don’t get another job and you’re not financially secure.”

How are redundancy payments calculated?

Generally, if you are entitled to a redundancy payout, it will be based on factors such as how long you’ve been employed, the size of your employer’s business, whether your employer has offered you a different job, and the ability of your employer to pay the amount owed. Terms and conditions vary so you need to check your contract to see what it states, or ask your employer.

One financial upside of being made redundant is that the tax treatment on payouts is favourable and if you’ve been with the company for a long time, you may receive a reasonable amount of the payment tax free. Be aware however, that the tax implications can be complicated so it’s important to get professional advice.

What happens once you’re made redundant?

If you are made redundant, setting up a budget is important. “You need to think about your cash flow and what your basic expenses are compared to discretionary expenses,” Hutton says. “You don’t want to blow any redundancy money on a car and then have nothing to support yourself with.”

He adds if you have investments, you need to work out how accessible they are. “For example, are you at your preservation age so you can start accessing super? Are your assets the right mix for what you want them to achieve? If you want your assets to deliver yield so you can rely on them for your living costs, are you able to reorganise them to do this?”

If your redundancy payout is unlikely to support you for long, you could also investigate what government incentives and benefits are available to you.

When the reality of being made redundant hits – unless you want to retire – you’ll likely want to find another job quickly. This may require thinking about what skills you have and if they’re still in demand. If you don’t think you can get another job in your field, you might look to retrain or look at alternative ways to make money, such as through the gig economy. You may also find that for your next job, you might not need the same level of income if you received a high redundancy payout.

How tax affects your decisions

Tax is another consideration. You should think about whether it is better to be made redundant in a new tax year so you pay less tax on what will likely be a reduced level of income. This is something you can discuss with your employer.

While redundancy payments are treated differently from a tax point of view, you may also pay less tax on your annual leave and your long-service leave. If you’ve been with a company for a long time, being made redundant means you may save a great deal of tax on these payments.

Seek advice if you need it

If you have been made redundant, it’s crucial to get tax and financial advice. Your financial adviser can help talk you through your situation and how you can best manage any redundancy payout. And remember, don’t take your redundancy personally. While it can be a negative experience, it could also turn out to be a turning point for your career.

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