Canada seems to have weathered the last recession fairly well with unemployment recently hitting its lowest point since 2008. But predictions of another recession, ongoing stock-market turmoil and the still-flailing U.S. economy might signal more Canadian layoffs looming on the horizon.
When a client’s job security is on shaky ground, an advisor has to be prepared. This means helping their client get the best possible severance package and making sure they have enough money to safely tread water while searching for a new job.
The best course of action will be determined by what kind of package a company offers.
“When someone is offered a severance package, generally they come to me and say ‘what do you think?’” says Holly Langley, CFP, a branch manager at Investment Planning Council. When dealing with a lump sum offer, it can be a challenge for a newly jobless client to make that money last. “They may not have a job to go to right away.”
According to Langley, transferring a lump-sum payment to an RRSP gives the client the chance to draw out the money in smaller lump sums at a lower tax penalty. “It gives them an advantage,” she says. “It makes their money last longer and gives them more time to find a job.”
Dale Gardiner, CFP, a financial advisor of D.A. Gardiner Personal Finance in Toronto, cautions that a lump sum payment can be put to good use, but only under the right circumstances.
“It’s important to know your client,” she says, “If the employee is marketable, then taking the lump sum and using the funds to pay down debt or invest in the market might be a good choice.”
|Read: Help for your unemployed clients|
|• Help laid off clients save on tax|
The flipside of this is an unmarketable employee, or one who has a much harder time finding work. This can happen when a client has been with their company for a long time and has skills that don’t translate easily to another job. The same goes for executives and other high-level employees who may have to wait a while for another high-profile job to open up.
For clients like these, Gardiner says, a package offering salary continuation could have an advantage. “If the employee isn’t marketable, then taking salary continuance will be the same as being on salary and will provide the family with an undiscounted income until another job is found. For a family that is always spending all of what is earned, this adds a level of constraint to spending. The lump sum might be depleted faster than if the salary continuance were taken.”
Of course, clients don’t always get the chance to pick what kind of severance package they’d prefer. Langley says these days she’s seen more and more companies opting for salary continuation-based packages.
“One of the drawbacks of that—and that’s one of the reasons why companies have gone to that process—is that when somebody does get a job, they’re severance package is stopped.”
The best severance package for your client might include more than what they get paid, says Dale Gardiner. “Companies may be restricted to the Employment Standards Act in making severance payments respecting salary, but might be more lenient on buyout of company automobiles, and allowing employees to keep electronic equipment.”
Companies are required by law to give a certain amount based on service, so seniority means a better severance. But the rule that a client has to work somewhere twenty five years to get the best package is not always set in stone, says Langley. Even in the face of a recession, companies will often decide to be generous.
“Each person is unique. I had somebody come to me a month ago who had only worked for the company for less than a year, and they were given double of what was required by law,” she says, “That was kind of nice, they didn’t really have to do that, especially for a short-term employee.”
Langley says that employers have become a lot more generous in recent years. She also points out that most companies would rather pay out more than be dragged through a messy arbitration process. “Even if somebody does go to a lawyer, then they go back to the company generally the companies will up the severance package just to settle and be done with it,” says Langley.
Since the law forces companies to pay a minimum amount, it’s never a risk to try to get more for your client. “It can never hurt to ask,” says Gardiner, “If you never ask, you’ll never know if more was available.”