Retrenchment in the tech sector continues unabated with redundancy announcements from Indeed, Workhuman, Amazon, Meta, Google, Microsoft, Salesforce, Alphabet and many others.
Accenture also joined the list due to its exposure to the tech sector and general wage inflation pressures all round.
MOJO Finance believes that it has never been more crucial for employees to seek proper financial advice when facing redundancy.
It’s crucial to educate yourself on your options if you’re one of the individuals who has just received or is considering applying for a redundancy payout from your workplace.
There are many considerations when considering redundancy. The two most important components are generally considered to be:
1. Your pension rights.
2. The tax-free lump sum possibilities of your redundancy package offer.
Your ability to receive tax-free lump sums from your redundancy package and your pension benefits may be significantly impacted by the redundancy drawdown alternatives you select.
For both redundancy pay-outs and lump sum pension payments, there is a lifetime limit of €200,000 that is tax-free.
Options for redundancy payments
Employees who have completed several years of service are typically granted a redundancy package.
Once you have worked for a company for two or more years, you are eligible for redundancy benefits.
Given that each redundancy package might be calculated differently based on the conditions, each one must be examined individually with years of service and average salary over their employment for example taken into consideration.
You are entitled to receive one additional week of salary on top of two weeks of pay for each year of service. There is a weekly payment cap of €600. This sum is exempt from tax.
Additionally, some businesses provide an incentive-based leave payout or a Redundancy Ex Gratia payment. The exempt component of these additional benefits is tax-free, while the remaining amounts are subject to the marginal tax rate (20/40%) of employees.
There are three ways to determine this Tax-Free Exemption under current Revenue rules.
Understanding the ramifications of each choice and what you might be giving up in terms of pension benefits by selecting one over the other is crucial. You should be eligible for the greatest tax-free exemption based on the option you select.
The following examples show the three methods for determining this exemption.
€10,160 in addition to €765 for each full year of service. With this choice, you can continue to be eligible for a retirement tax-free cash lump payment from your pension.
Basic exemption amount + (€10,000 less the tax-free lump sum entitlement from your pension amount).
This option is only accessible if you haven’t received a tax-free lump amount in the last ten years and aren’t currently receiving or will soon be receiving a lump sum from your employment pension.
You also forfeit your access to a tax-free cash lump payment upon retirement if you choose the increased exemption option.
3. Standard Capital Superannuation Benefit (SCSB).
Average annual earnings for the last 36 months x No. of years of service. Divide this number by 15 and subtract any lump sum pension payment received.
With this choice, you can either retain or forgo your right to a tax-free pension.
You must subtract the tax-free pension amount from the total in order to keep your pension tax-free lump sum entitlement, which lowers your redundancy tax-free exemption total.
You do not decrease the amount if you choose to forego your pension’s tax-free lump sum entitlement.
These computations are pretty intricate and you must carefully consider the three choices listed above and select the one that is best for you.
Given the uncertainty surrounding the accuracy of your employer’s calculations, it is strongly advised to have the redundancy estimates verified by a third party such as MOJO Finance.
Effects of redundancy on your pensions
How you use your redundancy package can significantly affect your pension benefits if you are a participant in your employer’s pension plan. Your right to a pension tax-free lump sum may be waived or retained depending on the Redundancy Tax-Free Exemption option you select. You should be eligible for the greatest tax-free exemption based on the option you select.
The goal is to make sure you are receiving as much money from your pension and your redundancy package tax-free. The usual option that is offered and the many tax-free areas that can be selected are illustrated below. Making the right choice can have a big effect on your financial situation for the rest of your life.
Options for Defined Benefit (DB) pension drawdown
If you select the appropriate course of action, you might also be able to access your pension fund once you accept your redundancy compensation as a result of changes to the law that took effect in May 2016.
You may be eligible for two tax-free lump sum payments starting six to twelve weeks before the day you leave your job if you decide to take the transfer value of your defined benefit pension (exchanging your future annual pension for one lump sum payment). However, in order to get your pension lump amount, you must be at least 50 years old.
A transfer value for your DB pension is taken.
It might or might not be financially advantageous to take a transfer value for your defined benefit pension.
The actuaries of the pension plan independently determine the transfer values offered.
The offer is often multiplied by the traditional offer’s annual pension entitlement.
Some offers can be improved, while others might just be very little.
Transferring usually makes financial sense if the Transfer Value is greater than 20 times the annual DB pension entitlement; if it is less than this, it might not.
It’s also crucial to understand the access ages, taxation, and ramifications of both the Transfer option and the DB option following death.
This can be a very personal decision that goes beyond money, therefore it needs to be thoroughly explored while taking into account your present and long-term financial objectives, obligations, and needs as well as your personal and family circumstances.
If you are single, widowed, divorced, or have children who are older than 22 when you pass away, it may have the effect of preventing your estate from receiving any pension benefits from a DB plan.
Defined contribution (DC) pension drawdown options.
Your defined contribution pension’s value is determined by the amount paid in and the growth attained.
The valuations can be very good if you have worked for a company for a number of years and both you and your employer have contributed.
You can choose to receive a lump payment from your DC pension tax-free. This is either based on your salary and years of service or 25% of the fund’s worth.
If you select the 25% option, you can invest the remaining funds in approved retirement funds; but, if you select the salary and service option, you must spend the remaining funds to buy an annuity.
Before you exhaust your redundancy alternatives, you should talk with MOJO Finance about your pension options if your employer has given for one, whether it is a defined benefit or defined contribution plan.
Make sure you have enough information to decide whether to waive or keep your tax-free lump payment.
It is crucial that you are completely aware of what you are giving up if you choose to forego your pension lump payment rights.
Many only perceive the tax benefits of the redundancy lump payout and are unaware of its true value.
If you are over 50, you will be able to access both of them after leaving your job.
Depending on the value of your pension, you may be giving up a far larger amount tax-free than what you will receive through the redundancy exemption.
To get the most out of both, speak with MOJO Finance before you sign your redundancy papers.
Keep in mind that you have a lifetime limit of €200,000 tax-free for both redundancy pay-outs and pension lump sums.
MOJO Finance provides guidance to employees facing redundancy as businesses offer a variety of redundancy and pension transfer arrangements to employees and former employees.
It is important to analyze the two components of the given redundancy package: pension rights and redundancy package.
Again, for both redundancy payouts and lump sum pension payments, there is a lifetime limit of €200,000 that is tax-free.
To get the most out of both, book a consultation with MOJO Finance before making a decision on the tax-free component of your redundancy offer.
MOJO Finance is waiving consultation fees for those seeking advice about the options presented by redundancy.