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Redundancy

Facing Redundancy

Questions & Answers

Where do I start?
What payments will I receive?
What are the benefits of rolling over?
Can I cash in my ETP at a later date?
What if I need a regular income?
What if I don't need a regular income?
Am I entitled to receive Government assistance?
What else should I consider?

Where do I start?

Redundancy is not an uncommon occurrence - most people know at least one person who has been retrenched.

However, when it's you facing redundancy, it's often difficult to remain calm and rational; the advice you gave to others may give you little comfort.

Your circumstances are unique, but the issues you confront will largely depend upon whether you're redundancy is voluntary or involuntary.

Restructuring you financial affairs can be the first step in achieving a new sense of direction and order in your life. Please note that the examples and case studies below are general opinions only, and are not intended as personal financial advice. Before making any investment decision, investors should consult a financial planner to ascertain their individual needs.

If you're facing redundancy, PARTNERS can assist in a number of ways.

What payments will I receive?

Tax Free Component

Your redundancy may include some cash benefits and an Eligible Termination Payment (ETP). The Government sets a limit on the amount of termination of employment payment which you can receive in cash; the remainder is paid as an ETP.

The tax-free amount for 2005/06 is based on the following:

$6491 + ($3246 x completed years of service)

Any amount paid above this threshold will be treated as an ETP and can be taken in cash or rolled over into a superannuation fund.

The taxation of your redundancy payment is a complicated area and it is important to consult a financial adviser to determine which strategy will be appropriate to you.

Cash benefits
You may receive all or a combination of the following cash benefits:

Part of your termination of employment payment;
Outstanding salary or wages if you're terminated immediately; and
Any annual leave, long service leave or leave loading owing to you.
You may be considering whether it's better to invest the cash component from your redundancy payment or whether you should use it for some other purpose, such as paying off the mortgage.

There's no standard answer to this question as it depends upon your individual circumstances.

Factors influencing your decision include:

Your ability to find a new job;
Whether you have dependants:
Whether your spouse, or partner is working;
The number of years before you retire;
The effect on your social security entitlements;
Your current financial situation;
Other debts you may have (for example credit cards, or a personal loan); and
Tax implications

Taxation of your annual and long service leave can be a complicated area. Variables include whether the lump sum was paid because of a bona fide redundancy, invalidity, or as part of an early retirement scheme.

Certain parts of your cash benefit may be taxed at up to 30 per cent: this may substantially reduce the amount of money you actually receive.

Eligible Termination Payments (ETPs)
The other part of your payment is called an Eligible Termination Payment (ETP). Your ETP will consist of your entire super benefit and the remainder of your termination of employment payment.

ETPs are subject to concessional tax rates and are the only portion of your redundancy payment which can be rolled over.

The table below shows the components of Eligible Termination Payments and the tax applied.

Component	Tax
Excessive component: Pre 1 July 1983 Post June 1983	48.5 % 39.5 % (incl. Medicare levy)
CGT exempt component	Tax free (within RBL's)
Concessional component	5% of this component added toassessable income and taxed at individual's marginal rate
Pre 1 July 1983 component	5% of this component added to assessable income and taxed at individual's marginal rate
Post 30 June 1983 taxed component	Fully included in assessable income, but subject to maximum tax rates as follows: Under age 55: 20% Age 55 and over: First $129,751 - nil Excess over $129,751 - 15% *
Post 30 June 1983 untaxed componen	Fully included in assessable income, but subject to maximum tax rates as follows: Under age 55: 30% Age 55 and over: First $129,751 - 15% * Excess over $129,751 - 30% *
Post June 1994 Invalidity component	Not subject to tax
Undeducted contributions	Not subject to tax

* $129,751 threshold is indexed annually. Medicare levy must also be added to the tax rates except where the nil rate applies

What are the benefits of rolling over?

Rolling over means transferring your money from one approved super fund to another.
The benefits of rolling over include the following:

by investing your ETP in an approved rollover fund, you can retain the concessional tax rate which applies to super benefits. This will defer or eliminate the payment of lump sum tax on your ETP.
investment earnings in a super fund may be taxed at a lower rate than your marginal tax rate, and may not need to be included in your tax return; and
lump sum tax rates are lower for people over 55. You can take advantage of this by rolling over your lump sum until you reach this age.

Can I cash in my ETP at a later date?

If you had access to the money upon leaving your employer, ETP rollover into super will be preserved.

Compulsorily preserved ETP

'Compulsorily preserved', means the funds must be rolled over. This amount takes into consideration a number of factors and will vary for each individual.

You can only access preserved funds:

if you're over 55* and retired from the workforce;
if you're in severe financial hardship (subject to trustee approval);
in the event of permanent disability or invalidity;
in the event of your death;
if you have terminated employment on or after age 60, irrespective of future work intentions;
if you are over 65.

*Your preservation age depends on your date of birth as follows:

Before 1 July 1960	55
1/7/60 - 30/6/61	56
1/7/61 - 30/6/62	57
1/7/62 - 30/6/63	58
1/7/63 - 30/6/64	59
After 30/6/64	60

What if I need a regular income?

You may find that you need your redundancy payment to provide you with a regular income. This may be because:

you've decided to retire;
you're having difficulty finding another job;
you need an income to supplement your social security benefits.

Purchasing an allocated pension, an allocated annuity or immediate annuity with your ETP is the most common way of generating an income. Annuities and pensions can be paid either for a set period of time or for the rest of your life.

Allocated pensions
These funds provide regular income payments in exchange for a lump sum. They allow you to control the frequency and level of payments you receive. Payments last until your death or until the money is exhausted (whichever is the earliest).

These funds are more flexible than an immediate annuity and are therefore proving to be popular with investors.

Immediate annuities
If you rollover your money into an immediate annuity, you can choose to receive a regular income either for a specified number of years or for life. This is a very secure investment which can provide significant tax and social securities benefits.

What if I don't need a regular income?

If generating an income is not a priority, you can place your ETP into the following investments:

company super funds;
personal super funds; and
self managed super funds.

Company super funds
If you're fortunate enough to find another job quickly and your new employer has a staff super fund, you may be able to roll over your benefit into that fund. Care must be taken with this option, however, as once your benefit is deposited, you may not be able to access your money until you cease working for your new employer.

Personal super funds
You could choose to roll over your ETP into a personal super find, which is a super fund offered by life companies and other financial organisations.

Self managed super funds
You may be able to set up a super fund of your own. Self-managed super funds (also called DIY funds) are funds which have fewer than five members. Self-managed funds are a popular choice for those people with significant amounts of money to invest, for example, a minimum of $150,000 (as per ASIC guidelines). A word of caution, however: the compliance and reporting requirements associated with managing your own super fund can be quite complicated and time consuming

Selection of the right investment vehicle will depend on your individual circumstances, time frames and objectives.

PARTNERS are well positioned to assist you in assessing the options so that you make the right decision for your circumstances.

Am I entitled to receive Government assistance?

Another important consideration is the potential impact your redundancy payment may have on your social security entitlement.

Once you leave work, you should register with the relevant Government departments to ensure that you receive assistance if you're eligible. This is important because there's generally a waiting period involved.

There are specific tests which the Government uses to determine the type and level of benefit you may receive.

The main entitlement you may receive is the Newstart Allowance. To qualify, you must be:

registered as unemployed; and
older than 18 but less than age pension age.

Other potential entitlements include:

benefits for children;
rental assistance;
health care cards; and
utilities concessions.

What else should I consider?

Whilst restructuring your financial affairs will help to give you a sense of direction and order, there are other issues you should consider.

According to some psychologists, all change, even a change for the better, is coupled with a degree of excitement and stress. The table overleaf illustrates various life events and how stressful they can be - with the mean value of 100 causing the greatest anxiety.

Social readjustment rating scale

Life Event	Mean value
Death of a spouse	100
Divorce	78
Divorce	78
Jail Term	63
Redundancy	47
Change to a different line of work	36
Spouse beginning or stopping work	26
Change in work hours or conditions	20

This study shows that redundancy can be stressful for you and for your family. However, if you're prepared for the change, the emotional impact of redundancy can be significantly reduced.

Health
At times of change and increased stress, maintaining good health and general well being are essential.

Regular exercise and sensible eating are great starting points.

Career development
It has been said that in every end, there is a beginning. SO, whilst redundancy marked the end of one job, you now have the opportunity to make your next career move.

You should consider what sort of job you are qualified to do and what sort of job would interest you.

Perhaps you'd like to find another job in the same industry?
Move into a new field?
Take on study to learn new skills?
Or even retire early?

The choice is entirely up to you - but whatever you do, you should treat the change positively.

PARTNERS can help you to make the most of your termination benefit and organise your financial affairs.

CASE STUDY – "I was made redundant after 20 years"

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