Redundancy where to from here?

Transcription

1 Adviser Services Customer services Phone Phone 133 Postal 665address ING Life Limited GPO Box nnnn Sydney NSW 2001 Website Website Brochure sub-heading if needed ING Australia Limited ABN Kent Street Sydney NSW 2000 This material is current as at March 2009 but may be subject to change. While the sources for the material are considered reliable, no responsibility is accepted for any inaccuracies, errors or omissions. It has been prepared without taking into account your objectives, financial situation or needs. Before making a decision based on this material, you should consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. Before acquiring the product or deciding whether to continue to hold a product, investors should consider the relevant Product Disclosure Statement which is available at Case study assumptions: no other employment termination payments are received and personal marginal tax rates exceed the caps that apply to employment termination payments. Valid to 30 June L4361/0309

2 Contents Introduction Introduction: The world financial crisis 1 Understanding redundancy 2 What payments will you receive? 2 Other important considerations 4 How will your other entitlements be impacted? 4 What are the implications for your personal insurance coverage? 5 What about your superannuation fund? 5 Effectively managing your debt 6 The world financial crisis In Australia, many major corporations have had to downsize following the world financial crisis. According to the Australian Bureau of Statistics, more than 44,000 full-time jobs were lost in December 2008 and the Australian jobless rate rose to a two-year high of 4.5%. In February 2009, 53,800 jobs were lost and the unemployment rate rose to 5.2%. The government forecast predicts unemployment could reach 7% by the end of the year. Being made redundant means there are many important financial decisions that need to be made. Issues to take into consideration include the tax implications of your termination payment, social security benefits and the continuation of your insurance arrangements. Having good financial advice may give you peace of mind and the best possible outcomes. An adviser can be a guiding light during this time and help you arrange your financial affairs in order to minimise the tax payable, maximise your government entitlements and to ensure that you maintain sufficient cash flow until you are re-employed. The difference between no advice and good advice could determine how well you manage the redundancy process. What social security support is available? 7 Top 10 redundancy survival tips 8 A financial adviser can assist you with: the tax implications of your termination payment eligibility for social security support managing your debts and regular expenses managing cash flow and budgets maintaining your insurance arrangements your superannuation options a review of your estate planning requirements the investment of your net termination payment the impact on your other entitlements (e.g. family tax benefits and the Government co-contribution). If you know you are going to be made redundant, it is important that you start planning with your adviser immediately. Getting appropriate advice prior to receiving your termination payments could provide you with significant tax savings, help you maximise your overall benefits and ensure that you are well positioned to seek new employment. This booklet contains important information you need to know upon being made redundant and includes the top 10 redundancy survival tips. 1

3 Understanding redundancy When you are made redundant, you should receive a lump sum payment of your entitlements. These entitlements may vary between employers and commonly depend on a number of factors, such as income, position and duration of employment. What payments will you receive? You should receive a payment for: any outstanding wages and salary any unused annual leave or long service leave. Depending on the nature of your employment and the workplace agreement in place, you may also receive an additional lump sum termination payment. Outstanding wages and salary There are no special rules that apply to outstanding wages and salary. This will simply be taxed as ordinary income at your personal marginal tax rates. Case study save tax by deferring the termination payment Meet William William is 54 years of age and is told that he is going to be made redundant. He will receive a taxable lump sum termination payment of $30,000. William speaks to a financial adviser to discuss his options. William s adviser explains that if he receives the lump sum in the current financial year, he will pay $9,450 in tax. However, if he defers the payment of this lump sum until the next financial year (when he turns 55), he would only pay $4,950 in tax. This would save William $4,500 in tax. William s adviser also explains that the financial security of his employer would have to be taken into consideration before asking the employer to defer the date of payment. Unused annual leave or long service leave If your employment is terminated due to a genuine redundancy, the tax on a lump sum payment of unused annual leave or long service leave would be a maximum 30%, plus Medicare levy. Depending on your circumstances, if you see a financial adviser prior to termination of your employment, you may be able to reduce the tax payable on these leave payments. Case study saving tax on your leave payments Meet Jim Jim s employment is about to be made redundant. He has unpaid long service leave of $12,000 (12 weeks leave with four weeks relating to a pre 16/08/1978 service period). Prior to termination of employment, Jim speaks to a financial adviser. The financial adviser explains that if the leave payments are received as a lump sum, he will pay $2,520 in tax. However, if he can negotiate a deferral of the termination date with his employer (up to eight weeks), this will let him enter a salary sacrifice agreement to sacrifice part of his leave payments into superannuation. The sacrificed leave payments cannot be accessed until he can meet a condition of release, but he will save $1,320 in tax. The adviser also explains that Jim could receive additional benefits such as additional accrued leave and possibly employer superannuation support on the sacrificed leave payments and that the four weeks leave relating to the pre 16/08/1978 period should be received as a lump sum upon termination which will help minimise total tax payable. Additional lump sum termination payment If you are entitled to an additional lump sum termination payment, part of this benefit may be received tax free. Depending on your circumstances (including your age and size of the payment), the tax payable on the amount exceeding the tax-free component may be capped at either 15%, 30% or could be taxed at the highest marginal tax rate. The Medicare levy may also apply. In some cases, deferring the date of payment and/or the date of termination can significantly improve your financial position. Getting advice as soon as possible and prior to the termination payment is essential. Depending on your circumstances, you may also be eligible to direct part of your lump sum payment into your superannuation fund. Case study save tax by directing all or part of the termination payment into superannuation Meet Brayden Brayden is 50 years of age and will be receiving a lump sum payment of $100,000 upon termination of his employment, plus leave payments of $40,000. Brayden s employer gives him the option of receiving this payment in cash or to direct it into his superannuation fund. Brayden seeks guidance from a financial adviser. The financial adviser informs Brayden that if he receives the termination as a cash lump sum, he will pay $31,500 in tax, leaving him $68,500 to invest. Alternatively, if Brayden was to direct his employer to pay the termination payment into his superannuation fund, he will only pay tax of $15,000, leaving him with $85,000 to invest in superannuation (an additional $16,500). The financial adviser also explains that if the termination payment is directed into superannuation, the funds cannot be accessed until a release condition is satisfied and additional taxes could apply when these benefits are withdrawn from the superannuation system. After speaking to the financial adviser, Brayden decides to direct his termination payment into his superannuation fund to maximise his savings for retirement, and rely on his leave payments to meet his ongoing expenses. 2 3

4 Other important considerations How will your other entitlements be impacted? Many benefits delivered through the social security and tax systems are based on your and/or your family s assessable and taxable income. All or part of the payments that you will receive will be included in your assessable and taxable income. Hence, they could reduce your entitlement to other benefits, such as: low income tax offset senior Australians tax offset pensioner tax offset spouse contribution tax offset (where the person made redundant is the recipient of the spouse contribution) family tax benefits baby bonus Government co-contribution. Case study reducing the impact on your family tax benefits Meet Vanessa Vanessa is a sole parent. Her only child is Ben, aged 20, who will cease to be a dependant early in the next financial year. Vanessa is made redundant late in the current financial year and she will receive a lump sum termination payment of $50,000. If Vanessa receives the termination payment in the current financial year, she would have to pay back approximately $2,380 in family tax benefits. However, Vanessa spoke to her financial adviser who explained that if they could defer the termination payment for a short period of time, delaying the payment to the start of the next financial year, Vanessa won t have to pay back the $2,380 in family tax benefits that she received. Given that Ben will cease to be a dependant early in the next financial year, any loss of family tax benefits in the next financial year would be minimal. The adviser also explains that Vanessa needs to take into consideration the financial stability of her employer before requesting them to defer the payment of any termination payments. After careful consideration, Vanessa spoke to her employer, who was happy to defer the payment until the start of the next financial year. As a result, Vanessa did not have to pay back her family tax benefits. At the direction of the adviser, Vanessa also informed the Family Assistance Office to cancel any possible family tax benefit payments for the next financial year. What are the implications for your personal insurance coverage? If you are being made redundant, you need to understand the implications that this will have for your personal insurance. A financial adviser will be able to provide you with a full risk assessment to ensure that you and your family remain protected in the case of an unfortunate event. History shows that during times of increasing unemployment, the incidence of disability claims and length of claims actually increase. Unemployment, especially long-term unemployment, could reduce the likelihood and the potential payout of your insurance benefits in the event that something does occur. If your insurance is within your employer superannuation fund, do you know whether you take this insurance cover with you when you leave the employer? Do you want to consider restructuring your insurance policies in order to reduce your level of expenses? A financial adviser can explain these implications and provide valuable advice in respect of your personal insurance arrangements. Tip: Make sure that you also keep your general insurance policies current and up to date. What about your superannuation fund? Upon termination of employment, you will have to review what options are available in regards to your current superannuation fund. Your adviser will be able to explore different options with you, such as whether you can maintain your current superannuation fund, or whether you should roll your benefits into a new fund. They will help you compare the features and the fees between superannuation funds and help you choose the superannuation fund that best suits your needs. In some cases, it may be beneficial for you to maintain more than one superannuation fund. Your adviser can also help you search for any lost superannuation benefits. Financial advice in this area will help you maximise your retirement savings, improving your lifestyle in retirement and ensure that you do not make any costly mistakes. Case study understand the insurance implications of switching superannuation funds Meet Holly 4 Holly s current superannuation fund contains $400,000 in death and total and permanent disability insurance. Holly is made redundant and she intends to consolidate all of her superannuation benefits into her new employer's superannuation fund. Holly s friend recommends that she should speak to a financial adviser. Holly speaks to a financial adviser and as part of the process, performs a full risk assessment. Her financial adviser also explains that Holly should leave her current superannuation fund in place until she can ensure that she get replacement insurance cover. Upon applying for new insurance cover, Holly is told that due to a medical condition, she cannot get replacement insurance cover. As a result, Holly s adviser has instructed her to maintain her current insurance cover within the existing superannuation fund. If Holly did not speak to a financial adviser, she would have rolled her superannuation benefits out of the existing superannuation fund and would have no insurance cover in place. 5

5 Effectively managing your debt What social security support is available? As part of the financial planning process, an adviser should review your current debts and determine whether these could be restructured to reduce payments and/or the amount of interest paid over the life of the debts. In addition, if you are receiving a lump sum termination payment and intend to use this to reduce your debts, it is essential that you understand the potential social security and tax implications that this may have. Getting the right advice in this process could reduce the term of your loans, reduce the amount of interest paid, maximise your social security entitlements and generate tax savings. The following case study shows how an adviser could add value (e.g. saving interest by restructuring your debt) without taking into consideration the lump sum payment. This will be part of the overall financial planning process. Case study restructuring your debt to reduce the total interest you will pay Meet Rachel Rachel has total debts of $580,000 as outlined in the table below. If she pays the debts over the current terms, the total interest expense over the period is $489,982. Debt Amount and interest rate (P&I) Repayment per month Total interest cost over period Home loan (20 years) $500,000 at 7% p.a. $3,876 $430,359 Personal loan (10 years) $50,000 at 15% p.a. $807 $46,801 Car loan (5 years) $30,000 at 15% p.a. $714 $12,822 Total $580,000 $5,397 $489,982 An adviser can assist you in determining what (if any) social security support will be available to you and how you can organise your financial affairs in order to maximise these benefits. If you are applying for Newstart Allowance (an unemployment benefit), you may have to serve a waiting period before you can receive a payment. Depending on your circumstances, your adviser may be able to reduce your waiting period. Case study how an adviser may reduce the waiting period for your Newstart Allowance Meet Brian Brian has been terminated from his employment and he will be receiving a payment of outstanding annual leave, long service leave and an additional termination payment, totalling $51,000. Brian s employer has given Brian the option of directing $30,500 of these payments into his superannuation fund. Brian speaks to his financial adviser who explains that if he takes all these payments as a lump sum, Brian would have to wait 51 weeks before he could receive any Newstart Allowance. However, should Brian direct his employer to pay the $30,500 into his superannuation fund, he would only have to wait 20.5 weeks before he could receive Newstart Allowance. His adviser also explains that any money directed into superannuation would not be accessible until a particular release condition can be satisfied. As part of the financial planning process, Rachel s adviser reviews her debts to determine whether valuable cash flow and/or interest savings could be generated. Rachel s adviser recommends that she consolidates all her debts into a single loan of $580,000 with an interest rate equal to her home loan rate of 7% and a term of 20 years. Her adviser explains that if Rachel can maintain her current level of repayments, her total interest expense would be reduced to $334,831 (much lower than $489,982) and the loan term would be 14 years and two months. Without advice, if Rachel paid the new minimum repayment ($4,497), her total interest cost would actually increase to $499,217 as some of her debts are now payable over a longer period. Rachel could have also used part of her lump sum termination payment to effectively reduce her level of debt and generate even further savings. Would you like more information? Your adviser can suggest strategies to manage your debt, including how to effectively use your lump sum termination payments, taking into consideration the tax implications, in order to provide you with the best outcome. 6 7

6 Top 10 redundancy survival tips 1. Act now and seek advice If you know you are going to be made redundant, seek financial advice immediately to ensure you don't miss out on any financial planning opportunities. Talk to a financial adviser before you receive your termination payment this will allow you to minimise tax, maximise your entitlement to other benefits and ensure you avoid making any costly mistakes. You should also start seeking new employment and organise your referees straightaway. 2. Be prepared Update your resume, improve your cover letter writing and develop your interview skills. Many job websites have sample cover letters and resumes you can view to get your documents looking and sounding professional. These job websites are a good resource for job hunting and practical interview tips. (Ask your financial adviser for a copy of the 'Be prepared' client resource flyer for more tips.) 3. Don t take it personally Being made redundant can have quite an emotional impact for some. Remember not to take it personally. Typically, redundancies are a sign of the times, e.g. the slowing of the economy. If you can realise that it is your position that is no longer required and that it had nothing to do with you or your work, it may help you to move forward and leave those negative feelings behind. 4. Know what you re entitled to It s important that you understand what you are entitled to when you are made redundant. Check with your HR representative and financial adviser about what termination payments you should be receiving. Find out what outplacement services you can access these services are generally free and run by specialists who can provide emotional and professional support to redundant employees and can help prepare you for the job market. 5. Get your finances in order When you have been made redundant, there are many important factors to take into account including tax implications of your termination payment, social security benefits and insurance arrangements. Your financial adviser can assist you with these issues, help you manage your debt and maintain cash flow until you are re-employed. Your adviser will also be able to recommend effective strategies to put you in the best financial position. 6. Review your skills set and take the time to upskill Evaluate your skills set and see if some of these are transferable into other roles. Do some short courses to upskill yourself in the variety of software programs that many industries use to help sell yourself better in the job market. 7. Target the right employers for you Think about what you really want to do next. Try not to rush into any job as it could be the wrong fit for you. Look at all possibilities carefully and whether there is scope for growth and development. Think about which industry sector and what employers you want to work for and research their company profiles. 8. Network and utilise resources Start networking as job leads can come from anywhere. Talk to people in your chosen industry, family, friends and former colleagues to build up your contacts. See career counsellors for guidance and visit recruitment agencies to see what jobs are on offer. Explore the hidden job market by cold calling or ing letters of interest to specific companies. 9. Be flexible In this market, some employers are not hiring as many full-time staff, so finding permanent work may take time. However, this means there is more part-time and casual work available. Be flexible and keep in mind that there may be some great temporary roles you could take on until a full-time role you want comes up. 10. Begin a new job with enthusiasm Remember that the first three to six months in a new role are the most challenging, but it is also a good opportunity for you to showcase your skills and experience to your new employer, so put in your best effort. It s a good idea to also have a career plan in mind so you can aim towards any opportunities for career progression within the company. As part of ING s ongoing commitment to reducing our impact on the environment, the paper used in this document is Forest Stewardship Council (FSC) approved. 8