Tom Noad* says that taking a redundancy or early retirement is a chance for a new chapter in life but the path to retirement will decide on entitlements and tax implications for payments.
There are three main paths to redundancy for public sector employees:
- Genuine redundancy
The ATO considers a redundancy to be ‘genuine’ if your employer removes your position, not you.
An example of this in the public sector is voluntary and compulsory redundancy programs aimed at reducing the size of the workforce by a specific number of roles.
- Non-genuine redundancy
A redundancy is considered by the ATO to be ‘non-genuine’ if you’ve resigned voluntarily, you’ve been retrenched but your role wasn’t made redundant, you retired or are over 65 years of age.
- Early Retirement Scheme
Employers can apply to have a voluntary scheme approved by the Commissioner of Taxation to encourage employees to voluntarily resign or retire early.
The path you’ve taken to redundancy impacts the payments you may be entitled to.
Redundancy payment entitlements
When you enter redundancy or an Early Retirement Scheme you will be entitled to a lump sum payment from your employer.
This payment may comprise of a severance amount, payment in lieu of your notice period, an incentive bonus and a contribution to assist in you obtaining financial advice or seeking employment services.
You will also receive a separate payment for any outstanding annual and long service leave you have accrued.
Your severance amount is based on your tenure, up to a maximum of 34 to 52 weeks of salary depending on the government organisation and your employment agreement.
How payments are received
You will receive your lump sum payment directly into your bank account. Employers can’t pay it directly into a superannuation account.
Once you receive your payment you can choose to contribute it to your super, within the limits of your scheme.
How payments are taxed
How your redundancy payment is taxed depends on whether the ATO considers the redundancy as genuine or non-genuine.
For genuine redundancies and approved Early Retirement Schemes a portion of your payment is tax free, depending on your number of years of service.
The ATO has set the following tax-free limits:
- For the 2017/18 financial year the tax-free portion is $10,155 plus $5,078 for each completed year of service;
- For the 2018/19 financial year the tax-free portion is $10,399 plus $5,200 for each completed year of service
Therefore, if you received a redundancy payment in 2017/18 and completed 10 years of service your tax-free limit is $60,935.
Any amount you receive over this tax-free limit is considered by the ATO to be an Early Termination Payment (ETP) and may be taxed at a concessional rate within limits.
Unfortunately, payments for non-genuine redundancies are considered to be an ETP. In this case there is no tax-free portion, and your payment may not be taxed concessionally.
5 tips for public sector scheme members considering redundancy
As a public sector employee, understanding your redundancy package and your superannuation scheme will help you maximise your retirement benefits.
Here are some tips to help:
For all public sector employees:
- Consider what you will do with your redundancy payment – whether you’ll use it as a mechanism to fund your lifestyle, pay down your mortgage or invest it.
- Double check that your employer has used the correct taxation method for the treatment of your lump sum payment.
- Bring forward the decision about your work status – whether to continue working or retire – to now. Deciding now can have a long-term financial impact on your retirement.
For defined benefits members:
- Review the impact of a voluntary redundancy on your benefit calculation. T
Taking your benefit early could result in a benefit calculation that is higher or lower than it would be than taking it at retirement or preservation age.
- Before taking a redundancy, decide whether it is likely that you will return to work with another employer. This decision impacts whether it is more beneficial to claim or defer your benefit.
Advice at the time of redundancy
Redundancy could be an opportunity for you to retire early or contribute towards your retirement.
Getting expert advice is the best way to feel confident you’ve made the best decision for you, within the rules of your scheme.
Some redundancy packages include a payment to reimburse you for financial advice so it’s worth checking if this applies to you.
Take the next step
With the right help, planning for your retirement is easier than you think. For more expert tips, visit the StatePlus website at this PS News link.
* Tom Noad is a registered financial adviser with StatePlus and can be contacted at [email protected]
StatePlus, formerly State Super Financial Services, is one of Australia’s leading providers of financial planning. Since 1990, our retirement experts have provided life changing financial advice to public sector employees and their families. With a StatePlus planner by your side, you can feel confident about reaching your financial goals to live the retirement you really want.
This article was published in July 2018. The information in this article is current at the time of writing the article. This is general information only and does not take into account your personal objectives, financial situation or needs. It is important to seek financial and taxation advice that takes into account your personal objectives, financial situation and needs before making any decisions based on this information.
