. SEVERANCE                                                   


I
t's always difficult losing your job, no matter what the reason might be. It can shake your confidence and interfere with the sense of security we all want to have. Fortunately, it's not the end of the world (even though it can feel like it!). The following are a number of severance strategies to help you better manage your transitional period.

Prepare a Family Budget

As soon as possible, complete a Family Budget and Net Worth statement. This is important for selecting your severance options and for peace of mind. It will also prove useful should you need assistance from your financial institution during the transitional period.

Carefully review the company-offered severance package

In most situations, the employer is offering the departing employee a monetary settlement related to the most recent position and years spent with the company. Though an emotionally stressful time, it is important for the employee to carefully review the package. 

Is the settlement fair? Does it reflect all aspects of your former compensation package, your position, contribution to the company, years of employment, reason for termination and likelihood of obtaining another job? If unsure, it is always advisable to seek the advice of a lawyer specializing in employment law.

Lump sum settlement or a monthly amount? 

If you have the option, is it better to take a lump-sum settlement or salary continuation (i.e. monthly payments)? There are benefits to each. A lump sum gives you immediate control over a large cash amount, and you can work with a Representative to invest this sum more effectively according to your financial situation. Another important advantage is that you are free to obtain another job without risk that your payments will be terminated.  

If you go this route late in the year, work with your employer to structure payment timing that minimizes income taxes. On the down side, your benefits typically terminate with this option.  

With salary continuation, if you obtain another job, you would typically only receive one-half of the remaining payments. Some individuals however, will feel more comfortable with the established routine of continuing to receive regular monthly payments and benefits coverage for the duration of the payment period. 

Whichever option you select, work with your company and Representative to minimize your tax liabilities. 

Putting the severance to use

Once the settlement is mutually agreed, what should you do with the money? Your first priority is to shelter your settlement so you won’t have to pay a huge chunk of tax on your payout.  

First, roll as much as possible into an RRSP. You can roll $2,000 to your RRSP for each calendar year (or part year) of service up to and including 1995, if you were a member of a pension plan. In addition, you can roll an additional $1,500 for each year of service prior to 1989 if you were not a pension plan member.  

Severance payments not rolled to your RRSP will be fully taxable. They will be subject to a withholding rate of 10%, 20% or 30%, so there will usually be additional taxes when you file your tax return. 

After the RRSP contribution, keep enough to cover short-term living expenses and expected income taxes. Then pay down the mortgage or other non-tax deductible debts if your cash liquidity situation is positive.  

To assist your cash flow calculation efforts, go to the Family Budget Calculator to set realistic spending targets that ensure you are living within your modified means. 

Dealing with a company pension fund

If you have a company pension fund, what should you do? Here are basic options: 
  • Leave the money in the old plan and start drawing a pension at some point after age 55;

  • Move it to a new employer’s pension fund, though this can be administratively difficult;

  • Take the commuted value of the pension (the amount that must be invested now to fund the future pension benefit) and transfer it to a locked-in retirement Account (LIRA). In most cases, this is preferred assuming the money is wisely invested. It will typically generate greater income over time than the non-inflation adjusted company pension.  

Employment Insurance Benefits

Apply for government employment insurance benefits immediately even though payments won’t begin until your severance money runs out (assuming you are unable to find other employment).  

Insurance Considerations

  • Life insurance – Group plans generally allow conversion to individual policies though at a considerable premium to the group rate. This is most relevant to an individual who has medical problems and may not be able to obtain any insurance except through the conversion process. Use the Life Insurance calculator to determine how much coverage you need before converting.

  • Medical and Dental insurance – determine when the current coverage ends. Your spouse may have coverage from his or her job. If so, make sure to change it to family coverage. If not, private plans are available.

  • Disability insurance – usually ends with employment. Check out your transitional period disability insurance options first. If you decide to work for yourself, contact selected insurance carriers regarding disability insurance for the self-employed. Though expensive, it is critical to have this income protection for your family.



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