Severance plan can help ease hard times

By JOEY FITZPATRICK Personal Finance

Not every employer glorifies the firing process the way Donald Trump does on The Apprentice, sending one recent contestant home without so much as a suitcase.

But even without a megalomaniac boss, getting canned can hurt, both psychologically and financially.

Far away from the lights and cameras, 620,000 Canadians lost their jobs in 2002, according to a report from Statistics Canada. In most cases they left with more than a suitcase - they also likely received severance. This presents its own set of questions.

For tax purposes, severance compensation is treated as income. Whether it's better to take the lump sum, to take deferred payments, or put as much as possible into your RRSP is something you should discuss with a financial planner.

"How much money from the severance package are you going to need to get by the next three to six months?" asks Daniel Elizondo, investment representative with Edward Jones in Bedford.

"It makes no sense to transfer it to the RRSP if they're going to need that money in the next few months."

Each year you can put up to 18 per cent of your earned income - minus whatever has been deposited by you and your employer into any group retirement plan - to a maximum of $13,500 into your RRSP. Any amount that is not used up can be carried forward into subsequent years.

There's something called the retiring allowance provision, which allows you to roll over funds received in a severance package into your RRSP, separate from your regular contribution room. You can roll over a maximum of $2,000 per year for each year of service, for every year up to the end of 1995. This retiring allowance provision was eliminated in 1996, and so years of service after Dec. 31, 1995, do not count.

The same provision also allows you to roll over $1,500 per year for each year up to and including 1988, provided you were not eligible to receive pension income during those years.

Like any sudden windfall, a severance package can catapult you into a higher tax bracket. So rather than receiving the severance package in a lump sum, it may be advantageous to take some of the package now and the rest in the following year, especially if you expect your income will be less in that year.

Elizondo always advises people to have a lawyer review a severance package before signing.

"You want to make sure there is no money left on the table," he says. "Sometimes the severance package contains less money than you're entitled to receive, so by consulting a lawyer you will be in a position to negotiate with the employer."

In fact, you can negotiate most elements of a severance package, even the key points like the number of weeks pay and the total payout.

Then there are benefits that can sometimes be extended for a period of time after termination, such as health benefits and even the use of a company vehicle or computer. Many employers will also include career counselling as part of a package for employees who intend to remain in the workforce.

Without a regular paycheque in the near term, it's especially important to lay out a personal budget, comparing your expenses against expected cash flow from savings, severance and employment insurance. It may be necessary to make some lifestyle adjustments.

"If the family has two cars, you may need to get by with one for the time being."

He also advises people to have an emergency fund on hand, which should be about three months' salary.

If you've just lost your job, it's important to remember that good things can very often arise out of bad situations, Elizondo adds.

"The thing I always tell people is: Don't panic. This can often be an opportunity to pursue the kind of work you've always wanted to do."

Joey Fitzpatrick is a Halifax-based writer.