Being laid off or presented with a voluntary package is emotionally jarring. Many people question their self worth and struggle to communicate the news to friends and family.
With all the emotions at play, it can be difficult to focus on the severance negotiations at hand.
That leaves a role for advisors to help tilt the financial odds in a client’s favour and ensure they begin their job search with a positive outlook. Here’s a checklist of items that may need managing:
Consider an employment lawyer
The Employment Standards Act spells out what an employee may be entitled to by law when let go from an employer. What many people don’t realize is that common-law severance, which often applies to higher-income professionals, can provide a different and potentially more lucrative alternative. A lawyer can help navigate non-disclosure agreements and other non-compensation related questions. Additionally, the fees paid to a lawyer are tax-deductible.
Map out the tax implications and cost/benefits of severance offers
Many employees are asked to choose between a salary continuance, in which they’re paid their salary for a given period or until they find a new job, or a lump-sum payment. As a further twist, the lump sum may be discounted (for example, 50 per cent of the salary continuance). A financial planner can help map out the tax implications as well as how long the money might last to help clients decide which decision is better.
It’s also important to consider whether health and dental benefits and employer RRSP matching cease once a lump sum is paid out. If so, a salary continuance may provide additional financial benefit that’s often overlooked.
Use up those benefits
If clients are in a transition period in which their health insurance benefits still apply, they should consider booking doctor and dentist appointments and finalizing payments for glasses and other items while they’re still covered. Some of these benefits, such as for orthodontics, can be worth thousands of dollars.
Clients should consider psychotherapy, often covered under paramedical, as well. Job loss can be devastating and talking through their feelings and next steps can help them move on.
Another component of this is career aid or re-employment counselling, which is often a non-taxable benefit. For executives or highly specialized workers, the company may provide special aid or services to help the transition to a new role as those jobs aren’t as widely available.
Benefits continued: Life insurance conversion
Some benefit plans allow clients to convert certain components of a group plan, such as life insurance, to an individual policy to own and keep. That can be handy for those with limited coverage or who don’t qualify for insurance. Additional paperwork is often required and clients should seek guidance from their advisor.
Plan out emergency funds and cash-flow management
Clients should have an idea of how long it may take to find the next job and know where to pull funds from in the meantime. This can be a combination of severance, employment insurance (EI, which only kicks in after the severance is up), and other savings and investment accounts such as a tax-free savings account (TFSA) for which there are no tax implications for withdrawals.
Advisors should make sure that investments are in line with the client’s risk tolerance; the last thing they need is for funds in a non-registered account or TFSA to plummet in value right when they need the money most.
Consolidate investment accounts
Job loss can be a good time to clean up investment accounts. Clients may have company shares through a purchase plan, stock options that require exercise or a group RRSP to transfer.
The default option is often for the investments to be cashed out and a cheque mailed to the employee. That can result in additional taxes and lost tax-shelter room in the case of RRSPs. Sleeping on these decisions is not an option.
Defined-benefit pension plans
A company may give an employee the choice of cashing out a pension (known as taking a commuted value) or keeping it and getting that guaranteed payment at retirement.
This is a multifaceted decision involving thousands (or even hundreds of thousands) of dollars and covering taxes, longevity, investment returns and long-term planning. If the amount is big enough, consider hiring a consulting actuary for an unbiased third-party opinion.
Seize a measure of control
One of the major sources of happiness for many professionals is a sense of control over their lives. Job loss – especially when sudden – removes that and can leave people feeling lost. Managing the areas that can be managed helps clients seize back some of that control and stability.
Finally, clients should know they aren’t alone. Many people have gone through a similar situation, and clients should be reminded there’s no reason to feel ashamed. Finding peers, loved ones and support groups can go a long way in coping healthily.
Aravind Sithamparapillai is an associate at Ironwood Wealth Management Group in Fonthill, Ont.
