Be careful with your redundancy cheque

A fat redundancy cheque might soften the blow of losing one's job, but like a Lotto win, there's a high risk of it disappearing. Amanda Morrall finds out how to make the most of it.

Who but the most highly restrained wouldn't be tempted to indulge in a little cash therapy after getting the boot and being handed a wad of dough?

Ordinarily, there may be some allowance for a self-pitying consumer binge, but during these tough times, a box of tissues and a pint of beer is more advisable, financial planner Brad Gordon says.

Survival is the name of the game in the present economic climate.

If the girth of the redundancy pay is sufficient, Mr Gordon recommends putting aside enough to see one through a considerable down time.

"A minimum of three months, but preferably six," says Mr Gordon, who works with Auckland's Macquarie Private Wealth. If the piggy bank is fat enough and the prospects for re-employment good, debt reduction is the next course of action with credit cards and mortgages the obvious target.

And in the absence of debt? Mr Gordon suggests looking at ways of achieving an income stream from one's redundancy nest-egg.

"Investments that will be long-term beneficial such as PIEs (portfolio investment entities) and safe income streams such as government-guaranteed bonds in particular."

Faced with the choice of paying down the mortgage or an attractive investment opportunity, Gordon says it is best to play it safe and pay down the mortgage.

"Unless, you're a real risk taker, that is. I'd say you won't receive a safe income stream than is higher than your mortgage and unless you structure it properly, it won't be tax effective either."

And being a taxable entity, finding efficiencies in that regard is probably not a bad idea.

Redundancy payouts are taxed at source, but the pinch is a little lighter than normal.

The Inland Revenue Department introduced a redundancy tax credit in 2007 so workers weren't punished by being pushed into a higher tax bracket.

Calculation of the rebate is based on a flat rate of 6 cents per dollar, up to $60,000 per redundancy.

So someone who receives a redundancy payout of $20,000 can claim a $1200 rebate.

The rebate is capped at $3600. However, certain eligibility rules apply:

The credit is generally allowed on redundancy payments paid to employees who are let go because their position is considered surplus, and where it is deemed compensation for loss of employment.

The redundancy tax credit does not apply to retirement, loss of seasonal employment, fixed-term contracts, employment for a period after notice of termination or a redundancy payment paid, directly or indirectly paid by an employer who is related.

Being spared the full brunt of the taxman may be cold comfort in an unemployment queue but a harsher reality and one that many face in New Zealand is no redundancy pay at all.

The Engineering Printing and Manufacturing Union says 85 per cent of the collective agreements under the union's charge have redundancy provisions.

But 80 per cent of New Zealand workers have no protection in a lay-off.

With unemployment expected to soar during the recession, that could leave many in the lurch.

To ease the financial pain, National introduced an unemployment benefit called ReStart. The three-pronged plan provides short-term support up to 16 weeks for those with six months' employment under their belt.

It includes supplementary accommodation subsidies, childcare support, plus employment and job services.

Council of Trade Unions spokesman Peter Conway says laid-off workers could use all the help they can get. The labour market is tight and will get even tighter as the recession deepens and jobs are pared.

"There's a range of considerations but I think the primary one is: don't get too carried away with a lump sum compensation without looking at the longer-term issues for you and your family."

Those tempted with voluntary redundancy packages need to weigh up the costs carefully.

For those closing in on retirement, it might make sense. Others with years of work ahead of them might be better off staying put.

"There will be some who think: `Ah, yeah, I'll get that money, that'll be good, then I'll go out and get another job.

"Well, actually, if you end up with a job that pays a lot less, and is a lot less satisfying, you do have to be careful of those sort of risks."

EPMU national secretary Andrew Little says that for those with job assurances, a voluntary redundancy could be a windfall. The attraction about a redundancy compensation package, provided it was reasonably healthy, was that a worker could repay the mortgage, or clear debt and, on that basis, be willing to accept a lesser job at a lower rate of pay.

"But you might want to be prepared for the possibility it could take you a lot longer to find a job of even that nature in this current environment. I think the situation has changed significantly in the last three months."

Six months ago, Christchurch couple Patricia and Darren Gauci gambled on the fitter-turner finding a new job after he was offered voluntary redundancy and walked away with $10,000 in the hand.

Mrs Gauci, who manages the family's finances, says it was an easy choice then but concedes in today's climate it could be a tough call.

"I'd probably be a lot more cautious about it now but as it turned out, Darren walked right into another job without a day off."

She says the couple spent the money on much-needed home improvements to accommodate their young family. Spending it on fun stuff wasn't an option, she says.

"I'm not the type to waste $10,000," she says.

Neither was Lyn, a Christchurch accountant.

When her husband received a $25,000 redundancy payout, the pair used it to dig out of debt.

Lyn has no regrets.

"We were very boring. We paid off a $22,000 loan and the rest we put on the Visa.

"We probably could have afforded to squander some of it, but we didn't."

Many today are of the same cautious and conservative mindset.

Online insurance adviser Connor Sligo says he had a number of calls from people asking about insurance to cover work redundancy. In most cases, income protection insurance does not extend to redundancy as it relates mostly to injury and illness.

While a few insurers, including Asteron, Sovereign and AIG, have added redundancy provisions to mortgage and income protection packages, Mr Sligo questioned the value.

"It's not particularly high priced but some of the plans aren't particularly good value for money.

"Personally, I think that redundancy is something that people should guard against by having their own emergency fund.

"If people can self-insure it'll save them some money."

So just how big should that rainy day fund be?

Mr Little says that is hard to gauge based on the uncertainty of the job market and how long you could be out of a job.

"My sense is that in the last five years, it has probably been reasonably short. It could take a matter of weeks to find a new job if that, but now it could be a question of months."

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