Thursday, September 1, 2016

Severance Planning – When You Lose Your Job


“When one door closes, another opens but we often look so long and so regretfully upon the closed door that we do not see the one which has opened for us.”  ~ Alexander Graham Bell.

Here’s a situation where these words of wisdom carry tremendous value.  You’ve been given the fatal news that your job is terminated.  Waves of emotions begin to take control when the news makes contact with your brain. Your mind churns the facts, asking the most logical question, “Now what?”

The questions following the shocking news are first centered around money issues.  But eventually, the money issues make way for others. You may feel a sense of grief, anger, or even euphoria. Every person will experience a range of different emotions on any given day.

Darryl Robinson, a Certified Financial Planner, delivered a presentation on Severance Planning: The Good, The Bad, and The Ugly at the Canadian Institute of Financial Planners 14th Annual National Conference.  Darryl, who once worked as a registered social worker, now specializes in offering financial, severance and retirement planning services.  He willingly shared his expertise on this important topic.  

One enormous take-away from Darryl’s presentation was that when people are seeking help with the usual requests,  “What should I do with my severance package and pension?” or “Help me pay less or no tax”, their underlying need is to know “Am I going to be okay?”  Darryl’s advice to the group was before you discussed any money issues, the first conversation should center on the client’s well-being.  Reach out and ask, “That’s rough.  How are you dealing with this?”  

Sharing your emotions is as important as dealing with the money issues.  You may be coping with a drastic change in your life as well as your lifestyle. Airing your feelings and concerns openly with a professional can help you deal with your frustrations.  

Available Resources and Provisions 

Retiring Allowance Provision

If you receive a retirement allowance, you may find some temporary tax refuge with the Retiring Allowance. Canada Revenue Agency described a retiring allowance (also called a severance pay) as an amount paid to officers or employees when or after they retire from an office or employment, in recognition of long service or for the loss of office or employment.  This link to the Canada Revenue Agency’s site discloses which specific payments qualify as a retiring allowance.

The lump sum payment (or allowance) is a taxable benefit and will be added to your annual taxable income.  Depending on your current year-to-date employment income, this added bonus may push your taxable income into a higher tax bracket unless you are able to take advantage of the Retiring Allowance.

The maximum limits determine the eligible amount based on the timing and duration of your years of service with the same employer. Consideration should be given to even temporary summer employment to increase the total years. 


·       $2,000 for each year or partial year of service before 1996


·       An additional $1,500 for each year or partial year of service prior to 1989 in which you didn’t earn any vested pension or DPSP (Deferred Profit Sharing Plan) benefits  

The most significant aspect of the Retiring Allowance is its ability to rollover your taxable allowance directly to an RRSP (Registered Retirement Savings Plan) without any immediate tax consequences, giving the flexibility and control to withdraw the funds when needed.  This extra “room”, per se, is in addition to your existing RRSP contribution room shown on your Notice of Assessment.  Utilizing both, the Retiring Allowance and RRSP contribution room, will maximize your tax savings if your annual taxable income is exceedingly high.  

This advantageous provision is often overlooked and doesn’t receive the necessary attention. Because the Retiring Allowance is available for years of services prior to 1996, some advisors and Human Resources employees are unaware of it.   Many dedicated and loyal Baby Boomers today, who have been committed to one employer, certainly may benefit from this if they are offered a payment.

A sample calculation is provided Jim Yeh, a blogger for Retire Happy, in his blog post, Dealing with Your Severance Allowance.

FCAC’s Checklist: Things to do if you lose your job

A valuable checklist is available from the Financial Consumer Agency of Canada (FCAC).  By clicking here you will see a number of actions if you lose your job. The list is fairly detailed and may appear overwhelming.  One important item on the list may help alleviate feelings of being overwhelmed: Consult an independent financial professional, such as a financial advisor or financial planner, to find out how to best handle your severance package, if you receive one.”

Employment Insurance

Another consideration is to apply for Employment Insurance. Most would not consider this option if their positions have been terminated and they received a severance package. Employment Insurance is available to those who lose their job through no fault of their own.  Applying for benefits while you transition to the next phrase of employment will provide the necessary financial help.  Specific details on How to Apply for Employment Insurance benefits are available here.

What’s Next

The better question may not only be “Now what?” but “What’s next?” 
When you received the news, you may have been on the verge of retirement.  You are not greatly affected. But if you weren’t ready for retirement, you have been presented with a new employment opportunity. I believe the important part is to hunt for the opened door.  I know first-hand the feelings of being delivered the fatal blow that your job is being terminated.  Grief certainly is part of the transition process to the “What’s Next” stage.  Recognize your feelings and acknowledge that they will pass when you develop new passions and desires.  Success will come to those who look for it.  Please share any challenges and experiences you encountered which may benefit others. 

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