What to do with a redundancy payout

 You wouldn’t really call a redundancy a career highlight given you’re losing your job. But you’re being compensated for that loss with a lump sum of money – in some cases up to a year’s salary or more.

Experts agree that a redundancy is not necessarily the career death knell it may at first appear.

For many, a redundancy and the payout that comes with it, can be the opportunity for a new start; perhaps a career overhaul, the chance to start a business, a slide into early retirement or the opportunity to boost your superannuation or pay down your mortgage. It could even be a long-awaited extended overseas holiday.

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The opportunity a redundancy brings really depends on where you’re at in life, your age – and the amount of money you receive. 

“It can very much be a re-start,” says Steve Mickenbecker, money expert at finance comparison site, Canstar. “People (who get a redundancy) tend to re-visit life goals, they ask themselves ‘What do I want to do? What do I value?’. The beauty is you’re being paid a sum that gives you some breathing space to work this out.”

What you do with your redundancy payout will depend on whether you need to live on the money while you look for another job. If you’re on the job market, you may need to make the money last an uncertain amount of time.

If this is the case, the first step should be to make a personal budget, which you can do using online tools and calculators, or with the help of a money coach or financial advisor. Beyond that, your options are simple – invest it or spend it – says Noel Whitaker, a finance columnist and author of Retirement Made Simple. However, the best financial roadmap will vary from person to person.

“I would start by talking to an advisor or your accountant at the outset who can explain the tax implications associated with a redundancy payout, which can be complicated,” Whitaker says. “The best thing you can do regardless of which option you take is to stay as flexible as possible. For instance, you can pay down your mortgage, or you can put your money into your mortgage off-set account, if your loan has one, so you can still access it should you need it.”

He says age also plays a factor. If you are older, you may want to put it in your super knowing you won’t be losing access to it for long, an option that is less attractive to someone in their 30s, for instance, who will not be able to access that money for several decades more.

Bryan Ashenden, the head of financial literacy and advocacy at wealth management company, BT, breaks down the figures on investing versus super.

“With an investment, you will get the benefit of not only the dividend or return, but also capital growth depending on how you invest the money,” Ashenden says. “For example, a $20,000 investment may generate a four per cent income return (or $800 per annum) but may also provide a capital growth of five per cent per annum (or $1000). So, after one year, your $20,000 investment is worth $21,000 and your $800 income return could either be re-invested or perhaps used towards repaying some of your home loan principal or interest.

“If invested via super, with the same rates of return, the $800 income return would be worth $680 after tax, but because it is locked in the super system until you access it, it can be reinvested (with the $1000 capital growth), meaning you have $21,680 as a net investment after one year.”

The added benefit of investing via super, he says, is that when you access the funds after the age of 60, the money comes back to you tax free. For some, the temptation to invest in a small business venture could also be alluring. But that could be a high risk option.

“There are a lot of challenges (to small business) in today’s environment,” says Small Business Association of Australia CEO Anne Nalder. “It’s not a booming period, with inflation tipped to go close to eight per cent by the end of the year and interest rates also going up.

“If you are going to invest in a small business, look at the potential growth areas and go into something you’re good at, familiar with and passionate about.”

Ultimately, while taking a holiday is a ‘sunk cost’ it could be just the refresher you need before making your next move.