When you analyse the current global economy, it is clear there is pressure on businesses which could result in restructuring and redundancies. If you are over 50 and are made redundant, you might be tempted to retire early, but there are some points to consider.
Your Pay-Out
If you're facing redundancy, understanding how your pay-out (which is based on your length of service) will be taxed is crucial for making informed financial decisions. Redundancy pay-outs consist of two components: a tax-free portion and a taxed portion. The tax-free portion is based on your years of employment, up to a maximum of $11,985 for the 2022-2023 financial year, plus $5,994 for each year of continuous service. This amount is not subject to income tax and will be paid to you directly by your employer.
The taxed portion, which includes any severance pay, accrued annual leave or long service leave, and any other payments related to your employment, is subject to income tax at your marginal tax rate. The taxed portion will be included on your regular pay-as-you-go (PAYG) withholding statement and will be taxed accordingly.
Tax-Offset
It's also worth noting that some redundancy payments may be eligible for a tax offset. This offset is calculated based on your age and length of service with your employer and can help to reduce the overall tax liability on your redundancy pay-out.
If you have early retirement in mind, it's important to consider your options. If you are in your 50s, your preservation age to access your superannuation is 60, so you must determine your ability to self-fund the period until then. Therefore, your redundancy pay-out could be best used to invest in tax-efficient savings vehicles (talk to your financial planner about the options that might be best for you) or paying off debts.
Your redundancy payment cannot be rolled into your superannuation fund by your employer, but you can make a concessional contribution to your super fund, which will reduce your tax obligations. This is subject to a cap of $27,500 for the financial year (this may include a Concessional catch up contribution as discussed earlier. You would talk to your financial planner to fully understand this), which includes your employer contributions.
Annual Leave
You should consider taking any leave owed to you prior to receiving your pay-out so that you receive your superannuation contribution for the period of leave taken. Even small amounts towards your superannuation will have a compounding effect over time. You could also ask your employer to make your redundancy pay-out in the following financial year which may be advantageous from a taxation perspective.
Redundancy and a transition to retirement can be an exciting period, rather than one fraught with trepidation. By seeking professional financial advice, you can make informed decisions that will set you up for financial success in the years to come.