The public sector continues to offer voluntary redundancies (VR). These can very tempting for people to accept, particularly if you are already nearing retirement. Here are some key considerations and questions I am often asked by clients who have been offered a VR.
Understand Your Future Position
Have a strong understanding of your financial position and future cashflow requirements.
The first consideration for a VR would seem an obvious one. Can I afford to take it and finish work earlier? The answer to this requires a clear understanding of the following:
- Living expenses including factoring in any changes to expenditure due to a change in working arrangements. You may be spending more or less once you finish work or you change careers. This needs to be calculated and understood.
- Future capital requirements: What are your lump sum expenditure plans for the future? Examples may include holidays, new car, home renovation or relocation, mortgage and other loan repayments.
- Your ongoing tax position after you accept your redundancy. In many cases clients end up paying a lot less tax once they accept a VR. This is particularly the case where income starts to flow in from CSS or PSS pensions and other superannuation income streams. Be aware that the taxation treatment of superannuation income differs and is dependent upon your age.
At Killara Wealth we undertake detailed modelling of client scenarios if they were to accept a VR taking into account the above considerations, so clients have the confidence to make an informed decision.
Your Super Options
Consider your superannuation options, particularly those in your CSS or PSS
When taking a VR know that the calculations for your CSS and PSS benefits can change. For example, if you are a CSS member then a VR can trigger the same calculation as the ‘54/11’ even if you are over age 55. This can provide a great second opportunity to assess your CSS benefit options. For PSS the Final Average Salary calculation alters and may increase without you having to wait until you next birthday.
Part of the assessment process of whether to take a VR is what your CSS or PSS entitlements may actually look like including their taxation treatment. At Killara Wealth these options are analysed on a fundamental mathematical basis and your options clearly explained and quantified to you.
You may have other non-defined benefit superannuation that also needs to be considered as follows:
- The preservation rules are different in terms of accessing that super.
- Interaction of other super ‘transfer balance cap rules’ of PSS or CSS.
- You may also be able to make additional contributions to superannuation to offset any tax liabilities or reduce the amount of tax payable over the longer-term.
Annual and Long Service Leave
Two common questions for VRs relating to leave entitlement. Let us deal with them here:
Should I take my annual and long service leave before I take the VR?
Generally, it is better to take these benefits as a lump sum where you are likely to claim a CSS or PSS pension. This is because:
- Lump sum leave payments are taxed concessionally as part of a redundancy and taxed at a maximum rate of 30% plus Medicare
- Additional CSS and PSS pension payments can be received once you have finished with your employer.
Should I wait to take the VR at the beginning of the financial year?
In a new financial year your assessable income for tax resets. If you are receiving lump sums for things such as annual leave, then it may be possible to further reduce the tax payable by deferring a VR until the next financial year. You need to consider whether your effective marginal tax rate will be less than 30% plus Medicare. If it isn’t then you probably won’t save any tax as tax on lump sum leave payments are limited to 30% plus Medicare. For both above questions, the impact of increased Contributory Membership for CSS or increase in Accrued Benefit Multiple (ABM) for PSS are factors requiring consideration.
At Killara Wealth we have over 20 years’ experience advising on VRs and CSS and PSS calculations and what option is right for you. Please contact us if you would like assistance with your VR and retirement planning.
