A client losing his or her job can seem like a bad news/good news situation. The bad news is your client is no longer employed; the good news is that he or she has been offered a financial settlement by the former employer.
But both losing a job and receiving a significant payment can add up to a disorienting, emotional experience. And whether your client’s severance package is a lump sum, a deferred payment or a salary continuance, any decisions about what to do with the money must be made carefully.
Maureen Glenn, manager, tax and estate planning with Toronto-based Richardson GMP Ltd., recalls one client who was so irate after his long-time employer shut down that he pulled all of his money out of the pension plan without really considering the consequences.
“That might not have been the wisest choice,” Glenn says.
Here are some ideas you can share with clients to help them avoid costly mistakes:
– Postpone drastic action
Remind clients to take a step back and not make any hasty decisions when they are laid off or receive a severance package.
“There’s a grieving period, and we don’t make good decisions when we’re in that kind of emotional state,” Glenn says. “So, clients need to take the time, get the advice they need and think [the situation] through.”
That doesn’t mean “do nothing.” Make sure you and your client are aware of all deadlines associated with the package, such as when the client must accept or decline the agreement and when they need to make decisions regarding their pension benefits.
– Seek legal advice
Ask clients if they have discussed their package with a lawyer. Ideally, this should happen before they’ve agreed in writing to receive their settlement.
Clients should be certain that the agreement is equitable, as it typically will include a “release of indemnity” that, once signed, prohibits the former employee from taking legal action.
“Discuss it with an employment lawyer in terms of fairness,” says Michelle Connolly, vice president, retirement and estate planning with CI Investments Inc. in Toronto.
– Gather relevant documents
The most important document to have and review with your client is, of course, the severance document. However, there are a number of other materials you should have on hand in order to assess your client’s financial situation.
For example, ask to see the client’s recent pay information, tax returns and any other related account holdings, such as an RRSP and a tax-free-savings account (TFSA) if you don’t have them on file.
– Preview the financial plan
Go through all possible scenarios with your client and keep the financial planning flexible to help deal with the uncertainty of when, if ever, the client might re-enter the workforce.
Look at your client’s overall financial situation – including cash flow, assets and liabilities. Figure out how much money will be needed to live on in the coming weeks, months or, possibly, years before the client finds work.
Clients also need to consider how their expenses will change, now that they are not working. For example, consider lower transportation costs. On the other hand, your client may have to cover expenses, such as gym memberships, that previously were covered by the employer.
This is also a good time to review your client’s investment plan and to reassure him or her that despite the uncertainty of the moment, the client still can stick to their long-term strategy, says Jeanette Brox, senior financial consultant in Toronto with Investors Group Inc.
“It is a big shock, [and] probably hit them out of left field,” Brox says. “But cool heads must prevail.”
Although every situation is different, Brox says, she doesn’t generally see a need to rework the investment plan when a client is laid off. That’s because clients are likely to have access to other sources of income for at least the immediate future, such as an emergency fund.
– Consider all options
Despite the uncertainty, a sudden layoff could provide an opportunity for clients to change careers or retire earlier than originally planned. Clients who get terminated five years before their expected retirement date often think their retirement plan is destroyed, says Darryl Robinson, a fee-only certified financial planner with D. Robinson + Associates Inc. in Winnipeg. But clients could be in a position to retire or to spend a few years working part-time.
“It’s often very reassuring for people to know what that alternate scenario would look like,” Robinson says, “because they often get transfixed on a particular date and don’t look at other opportunities.”
Another possibility is for your client to enrol in an educational program to learn a new skill or change careers. In such cases, the client may decide to take advantage of the federal Life Long Learning Plan, which allows them to withdraw funds from an RRSP to pay for full-time training or education.
– Beware tax issues
If clients receive a lump-sum payment toward the end of a calendar year, they could end up with a significant tax bill. One question to discuss with clients is how much of the settlement they can place into a registered account to reduce their tax burden.
Find out how much contribution room your client has available in his or her RRSP. As well, if your client worked for the employer for a long time, he or she is likely to be entitled to make additional RRSP contributions.
Clients who worked for the same employer since prior to 1996, or were employed by the firm prior to 1989 and were not enrolled in a company pension plan, may contribute certain portions of their severance package to their RRSP regardless of contribution room. Those in the former situation may contribute $2,000 per year worked up until 1996; if the latter situation also applies, the client may contribute an additional $1,500 per year of service up until 1989.
While putting away as much of a client’s settlement as possible into an RRSP may be beneficial, that is not always the best plan.
For example, while a client may save on taxes initially by making a sizable RRSP contribution, he or she may end up having to make a withdrawal from the account months later to pay for daily expenses. Instead, your client may choose to place those funds in a more flexible account, such as a TFSA or a non-registered account, both of which the client can access without sacrificing RRSP contribution room.
– Keep the benefits
Another important point to review with clients is what happens to their health, dental and life insurance benefits as a result of the severance package.
Many insurers will allow group plan members to transfer to an individual plan without having to provide medical evidence, says Glenn. While the costs of the individual plan will be higher, this plan may be worthwhile for clients and their families if such benefits are important to them.
– Accept help
Ask clients about the resources their employers are offering, such as employment counselling and placement services.
Says Tim Brisibe, director, tax and estate planning with Mackenzie Investments in Calgary: “A placement service can help you in the process of engaging back into the workforce, locating another job or even striking out on your own.”
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