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Home / How super works / Employers guide to super / How redundancy and retirement impact your employees’ super

How redundancy and retirement impact your employees’ super

November 13, 2020 by Janine Mace Leave a Comment

Reading time: 3 minutes

On this page

  • Super and employee termination payments
  • What is the process when an employee retires?
  • Useful resources for your retiring employees

When leaving an employer – whether you’ve been made redundant or retired – there are different types of termination payments, some of which are added to your super.

For employers, calculating these termination payments can be confusing, as only some employee benefits are included when calculating the relevant super payments.

Then there’s the question of what happens with a retiring employee’s super and the advice or assistance you can provide as they move into their new life stage.

Super and employee termination payments

An employee termination payment (ETP) is a lump sum payment made when the employment of one of your employees is terminated. The termination can be for a range of reasons, from redundancy to retirement or resignation.

For an employer, the key point to remember is that just because a payment is an ETP, it doesn’t necessarily mean you are required to make Super Guarantee (SG) payments on it.

Under the SG rules, employers must make quarterly SG contributions on behalf of their employees calculated at 9.5% (in 2020/21) of the employee’s ordinary time earnings (OTE). In most cases, OTE covers an employee’s ordinary hours of work plus any bonuses, allowances, annual leave and sick leave.


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For more information, read SuperGuide article Calculating your employees’ SG contributions? The rules to help get it right.

Some termination payments, however, are excluded from OTE, including overtime, annual leave loading, parental leave and on-call and fully expensed allowances. The main termination payments that don’t require an SG contribution are listed in the table below.

Employee termination paymentIs super paid?
Termination payments: in lieu of noticeYes
Termination payments: unused annual leaveNo
Termination payments: unused long service leaveNo
Termination payments: unused sick leaveNo
Termination payments: redundancy paymentsNo
Workers’ compensation (returned to work)Yes
Workers’ compensation (not working)No
Ancillary leave (jury duty, defence force reserves)No
Parental leave (maternity, paternity, adoption)No

Source: ATO website

What is the process when an employee retires?

For employers, the key issue when an employee retires is calculating their termination benefits. If your retiring employee plans to withdraw their super benefits, access to their savings is governed by the super laws and administered by their super fund, so you don’t need to worry about helping them withdraw their money.

As super savings are designed to be used in retirement, there are strict rules governing your employee’s ability to access their super before they reach their preservation age.

For more information, see SuperGuide article What age can I access my super (Preservation Age)?


Need to know

Preservation age is not the same as the age you can apply to receive the Age Pension. Your preservation age only relates to accessing the benefits in your super account.

Learn what your Preservation age and Age Pension age is.


Once your employee reaches their preservation age, they can access their super benefits, but they still need to meet a condition of release and apply to their super fund to withdraw their savings.

For more information, see SuperGuide article When can I access my super? All conditions of release explained.

Depending on your employee’s preference, generally their super benefit can be paid as an income stream or a lump sum, or a combination of the two:

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  • Income stream (super pension or annuity): A series of regular payments from the super fund. These must be paid at least annually and must meet the government’s minimum annual payment rules.
  • Lump sum: A single payment that withdraws some or all of the super benefit. With a lump sum withdrawal, the money is no longer within the super system. If it’s then invested, any investment return is taxed like normal income, not super. This means the concessional tax rate of 15% on a super account’s earnings no longer applies.

Whether or not your employee will have to pay any tax when they withdraw their super benefits after retiring depends on:

  • Whether they have reached their preservation age
  • Whether they plan to take a lump sum or an income stream
  • The tax-free and taxable components in their super benefit
  • The current low-rate threshold or cap.

For more information, read SuperGuide article Your tax guide to accessing your super under age 60.

Once your employee reaches age 60, they can withdraw their super benefit more easily and most people will pay no tax. Your employee, however, will still need to meet a condition of release. At this age, common conditions of release include retiring from the workforce or starting a transition-to-retirement pension.


Need to know

After age 65, your employee can access their super even if they have not retired, as reaching this age is considered a condition of release. This allows them to access their super savings either as a super pension or a lump sum.

For more information, read SuperGuide article When can I access my super? All conditions of release explained


A big attraction of taking a super benefit after age 60 is that for most people not only is their money free of any benefit payments tax, it’s also free of income tax if they take it as an income stream.

For more information, read SuperGuide article Your tax guide to accessing your super over age 60.


Warning

Choosing whether to take a lump sum or income stream from a super account and how to invest super benefits to create retirement income are complex financial decisions.

As an employer, this is an area where you should not provide any advice to your employees on the best course of action. Only a licensed financial adviser or tax accountant holding an Australian Financial Services (AFS) licence has the necessary skills and qualifications to provide personal advice on these issues.


Useful resources for your retiring employees

If you have an employee who is retiring, there are a number of decisions for them to make. That means they need lots of information about their finances – and their super in particular.

Government agencies offer a number of free resources to help people planning for their retirement. If your employee asks for help, you can direct them to the following websites:

  • ASIC’s MoneySmart
  • Services Australia’s Financial Information Service

SuperGuide offers more than 500 articles, how-to guides, checklists and tips on retirement planning, tax-friendly investment and retirement strategies, and detailed guides on how to enjoy your retirement. We also provides regularly updated performance rankings for super pension funds.

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Your employees can find lots of useful information in these SuperGuide articles:

  • Countdown to retirement: Tips to help kick-start your retirement plans
  • How to plan for your retirement
  • Rules of Thumb: Do these popular retirement planning hacks measure up?
  • Age Pension calculator: How much could you be eligible for?
  • Am I eligible for the Age Pension?
  • Worried about your post-virus finances? 10 tips to help stretch your retirement dollars
  • Your simple guide to state Seniors Cards: How they can save you money
  • What government services are available for older Australians?
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Learn more about employer super responsibilities in the following SuperGuide articles:

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December 1, 2020

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November 13, 2020

How to create an effective salary sacrifice arrangement with your employees

November 13, 2020

Employee super contributions for the self-employed and micro businesses

November 13, 2020

Checklist for employers: 7 tips to help you master your super responsibilities

November 13, 2020

Employer’s guide to Superannuation Guarantee (SG) contributions: Which employees are eligible?

November 13, 2020

Choosing a default fund for your employees

November 13, 2020

Calculating your employees’ SG contributions? The rules to help get it right

November 13, 2020

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