With COVID changing work indefinitely, there has been a surge of severance offers being given to employees. I've summarized a Financial Post article highlighting a few key considerations before you sign any paperwork. The original article link is below.
 

• Understand the terms:
   
  • Typically you will receive a severance payment based on your salary and your years of service.
  • The amount is usually bigger than what you'd get if you were terminated outside of a 'downsizing' period
  • It can be paid as a lump sum or as a continued salary for a period of time. In some cases, they may allow you to defer it until the next year.
     
  • Keep in mind:
    • This income is taxable in the year it is received. Lump sum payments can push you into a high tax bracket. RRSP contributions can help reduce the tax burden.
    • If you don't know if your offer is reasonable, it helps to talk with others in your situation (to compare), or even an employment lawyer.
       
• Loss of Benefits:
   
  • Group insurance benefits (dental, health, vision, etc.) normally continue through a severance period. They typically will end once the period is over unless some sort of retiree plan is available. 
     
  • Keep in mind:
    • Private insurance is an option (although costly), so is self insuring (i.e. paying for everything out of pocket). You'll want to run the numbers to see if what you'd pay in premiums is more or less than what you're likely to pay out of pocket. Also keep in mind that you may have some coverage through the government (i.e. if you are over 65 or your kids are still in school)
    • When benefits are coming to an end, it can make sense to do that extra dentist visit, get the new set of glasses, etc.
       
• Company Pension / investments
   
  • There are two types of pensions, defined contribution and defined benefit.
    • Defined contribution pension plans (known as DCPPs) are similar to RRSPs, the main difference being that when you leave a company there are rules as to when you can access that money. DCPPs are most often moved into LIRAs when you leave a group plan.
    • Defined benefit pension plans (know as DB plans) are what most people think of as a "pension". Think firefighter, teacher or government employee.
       
      • Keep in mind:
        • When are your payments going to start?
        • How are they calculating your years of service? How much would your spouse get if you passed away?
        • If they are offering you a lump sum (aka a commuted value), is it worth it?
        • These are in depth questions that you should be talking to a financial professional about. There should be a high bar to opt out of taking your pension.
           
• Retirement planning
  • Can you afford to retire? What does that unexpected change mean to your financial plan?
  • When should you take CPP?
  • What are you going to do with your time? Are you going to miss your coworkers? A lot of people's identity is in their work.
  • Do you have an idea of what you spend each month? Have you "test driven" it - i.e. lived for a period of time at your desired retirement income?
     

There are many considerations before making your decision. In some cases these packages are slam dunks, others have big risks. We are always here to provide you with clear guidance within the framework of a written financial plan. Feel free to call us and we can talk it through (either face-to-face, via Webex or phone).

Here is the original article.

 

All the best,
Gary, Vito and Eric


 

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