Primed for a redundancy payout? Plan carefully

Anyone facing redundancy must take the time to understand all the options available to them.

The Coalition's return to government has raised the possibility of significant reductions in public service jobs in Canberra and around Australia. While the election campaign focussed on achieving this by national attrition (not replacing those who leave), the reality is that achieving the required savings must involve redundancies.

There's also the possibility that the new government could follow the path pursued by the Australian National University and other universities: offering less generous early-retirement packages. Whatever decisions are ultimately made, individual public servants can benefit from understanding where they stand if the worst happens and their jobs are threatened.

This is not the first time there have been widespread job losses in the public service and there are valuable lessons to be learned from past mistakes. For example, many former employees of the departments of Defence and Administrative Services now regret their 1988 decisions to cash out their CSS redundancy entitlements as a lump sum, instead of taking an indexed pension or preserving their benefits until age 55 or later.

This was at a time of widespread job-shedding by the Hawke government. The temptation to take the lump sum and run was increased by interest rates as high as 18 per cent a year. Unfortunately for them, many public servants at the time were poorly informed about their entitlements and sought advice from a financial services industry motivated largely by fees and commissions.

Compared with the income generated from helping clients to cash out their super, giving redundancy advice to take a federal government pension or defer entitlement in the CSS generated no extra income. As a result, the prevailing high interest rates and the lack of knowledge about the value of the redundancy options led to many ill-judged, long-term decisions.

This time around, especially with a tightening of the rules governing the charging of fees and commissions, exiting public servants are less likely to be subjected to intense pressure to take their money and run. While superannuation fund returns improved markedly over the past year and are still strong, the global financial crisis has increased the awareness of the potential volatility of investment returns.

With interest rates at historically low levels and likely to remain there for some time, there's also increased knowledge about the value of indexed pension benefits. Indeed, one explanation for the faster-than-predicted growth in unfunded superannuation liabilities is that the take-up of the PSS pension benefit is much higher than forecast when this fund was introduced in 1990.

The attractions of a redundancy will vary widely from individual to individual, especially compared with the value of continuing employment and larger CSS and PSS benefits from further employment. However, in situations where public servants are contemplating retirement or changing jobs, redundancy can provide extra attractions.

For CSS members, the closer they are to age 55, the more attractive are their redundancy options. After age 55, the redundancy provides them with two pension options: the normal retirement option or the preservation option, which normally ceases two days before age 55.

Before age 55, while an immediate redundancy pension option is available, many members will obtain larger benefits by preserving their benefits until age 55 or later. Even though it was never intended to do so, a redundancy offers major attractions to PSS members, especially compared with resigning and particularly for younger fund members.

The PSS rules normally force members to reach age 65 or to retire from the workforce to access their employer benefits, either as a pension or a lump sum. But in redundancy, they can access all their benefits as a lifetime indexed pension starting immediately, even if they don't intend to retire from the workforce.

What's more, this pension is offered at very attractive rates compared with private sector pensions and available investment returns from safe investments. At age 40, for example, the indexed pension is calculated by dividing the lump sum by 15, whereas the private sector would charge at least 20 times the pension payable at age 65. A further attraction of taking the pension is that the alternative lump sum will be tied up untouchable in super until at least age 55 or 60 for younger members.

Anyone contemplating or facing redundancy needs to understand all the options available to them to avoid the mistakes made by many earlier redundancy recipients.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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