We refer to visas and the current rules for temporary migrants, but we emphasise that…
Jarrod Rogers CPA, Feb 2022
The early retirement scheme (ERS) or early retirement plan (ERP) is offered to employees in the Victorian public service from time to time. With the size of public service there is always likely to be one department or another restructuring, meaning these offers are very common.
If you’re considering opting-in to the scheme it is worth getting advice.
Not only is this one the biggest financial decisions you’ll make in your life, but you usually receive an allowance from the VPS to pay for advice (if you’ve been formally offered an ERP), so it’s a no-brainer to seek some professional input.
How does the VPS early retirement plan (ERP) work?
The scheme is pretty straightforward, despite the confusing, number-laden offer document you will receive.
- You receive a lump sum “ERS payment” (explanation below)
- You also get paid out all your annual and long service leave
- You agree to certain restrictions, mainly that you can’t work in the VPS for an agreed period (minimum one year, usually)
Tax on an ERS redundancy payment
To give some more detail, the ERS payment is a redundancy. This is an amount you’d be getting anyway. A genuine redundancy payment has a special low-tax status. The ATO allows a set amount of the payment to be tax free, based on completed years of service. Depending on your salary, the ERS payment is often entirely tax free.
This is a real boon compared to a normal salary or bonus of which a large portion (usually at least one third) goes to the ATO. To put it in perspective, a salary of $139,454 pre-tax is worth $100,000 after-tax. So an offer of $100,000 in your pocket is very valuable.
Note: if you are past retirement age the tax-free status does not apply, although a concessional rate of tax (17%) does.
Payout of your annual leave and long-service leave
This element of the early retirement plan offer (ERP offer) isn’t as much of a bonus. Your leave entitlements are your rights regardless of whether your leave your employment under a redundancy, an ordinary resignation or you are terminated.
The tax on this portion of the payout is 32%. This is cheaper than normal tax rates, but only marginally. If you earn under $120,000 your usual rate (34.5%) is pretty much the same. If you earn above $120,000 it’s still only 39% tax. It’s not a significant factor compared to the tax free ERS payment.
Should I accept early retirement from the Victorian public service?
I hate to use a disappointing financial cliché, but it really depends on your personal situation.
But here are some general tips from my experience with clients who have considered and/or accepted the offer:
- Base your decision mainly on the ERS payment component, not on the entire lump sum. As I said, the leave entitlements are yours regardless, and you’ll eventually get the benefit of this one way or another. It’s the redundancy payment that you’re losing by declining the offer.
- Once you receive the lump sum, consider using some of it to top-up your superannuation. You can make concessional contributions of up to $27,500 and you should gain a tax advantage by maxing that out.If you have less than $500,000 in super you can “carry forward” your unused super caps from prior years. For example, if your employer put in $15,000 per year into super for the past four years you can use the remaining $10,000 (note: the limit was $25,000 until this year) and get a bigger tax break by topping up super.
Seek advice to ensure this is right for your situation.
- If you’ve pretty much decided you want to retire in the next one to two years (or, if you had already decided to leave the public service) then it makes sense to take the package. You’re getting a bucket of money to do something you planned to do anyway. In fact, you should be in such a hurry to sign the offer that you’ll risk giving yourself whiplash.
- If you don’t want to retire, or feel you are not financially able to retire, are you confident of securing an equivalent role in the private sector?The lump sum is a nice boost for your finances. But it will run out if you need to live off it while being out of the workforce.
If you’re not sure whether you can retire, a financial planner can analyse your situation and tell you if you have enough assets to meet your living costs in retirement.
- If you are over 60 years old, ceasing an employment arrangement means you meet one of the definitions of “retirement” for the purposes of superannuation.This means that, whether you continue working or not, you can cash in your super, start an income stream (aka pension) and the future earnings on your super are eligible to be taxed at 0%, instead of the 15% tax that applies pre-retirement.
You also have the opportunity to undertake a “re-contribution” strategy to protect against future superannuation tax, including the little-known death tax that applies when you leave super to the next generation.
Depending on where you’re at, one or more of these superannuation options could be a big benefit to you.
Where should I seek advice?
If you already have a financial planner, I would recommend you seek advice from them. Yes, this article is essentially an advertisement for our services, but it’s an honest advertisement!
A good financial planner will know your current financial position and be able to explain how the payout will impact your and your family. If you have a financial planner who you have confidence in then they are worth hanging on to.
If you don’t have a financial planner already, seek advice from your accountant. Ideally, they can also assist with financial planning services.
If you are currently not aligned with a financial planner or an accountant, or perhaps your current accountant cannot offer financial planning, then feel free to book in a time with us. As well as being registered tax agents we also provide financial planning services in conjunction with our joint venture partner.
We will supply a receipt for the session so you can seek reimbursement from your department.
We’re here to help.
You can book using our online booking page, as we offer both online appointments as well as face to face meetings in Melbourne.