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To cash in now or to cash in later? That is the question.
Every Canadian Forces (CF) member has a very important financial decision to make before mid- March 2013. The decision is “what do I do with my severance pay?”
As poetic as that question seems to be, a bit more science than art should be applied to the decision making process on how to handle the one-time opportunity that will be presented at the end of this year.
So what is happening?
The Government, in order to bring public sector benefits more in line with the private sector and in the interest of fiscal austerity, has decided to stop accumulation of severance pay for CF members upon voluntary release. Severance will still be paid in cases of involuntary and medical release.
No one will lose any severance benefit that has been accumulated and, instead of future severance accumulation, pay will be increased gradually. The severance amount will be calculated as one week of severance for every year of service and will be pro-rated for partial service years. For those serving in the Reserves, severance will be calculated on continuous enrolment rather than on paid service.
Serving members will be given a choice about whether they would like to:
- take their accumulated severance pay “in lieu” as a lump sum in 2013,
- take their accumulated severance pay as a lump sum upon termination or
- take a portion of their accumulated severance in 2013 and leave a portion until they stop working
The decision on whether to take all or some of the lump sum in lieu of will have to be elected between mid-December 2012 and mid-March 2013.
Of course there are pros and cons to each of the three options, so here are some points to consider about whether to take the payment in lieu.
- You have money available to pay down bad debt immediately. Good debt is debt used for an investment – a home or a portfolio or a business. Bad debt is debt used for items that do not grow in value – such as consumer debt, credit card debt, and car loans. Then, if you are diligent you could then re-direct the cash flow formerly used to pay down this debt, towards saving for a short term goal or towards your RRSP.
- Taking the payment in lieu of means you may have funds to add to the down payment of a home or investment portfolio.
- You have control of the funds If you believe that you can grow the money faster than if it were left until termination.
- You can contribute to your RRSP means you have tax-sheltered growth of those funds and they are under your control.
- The amount will be calculated on your current pay scale, not your pay level at termination. So if you are at the beginning of your career and intend to remain in the CF for 30 years this difference could be considerable.
In addition to the foregoing, you and your tax advisor should consider the tax consequences to receiving a severance pay.
One of the keys to making the best decision for you is to consider your unique short and long term financial goals. If you have debt that you would like to reduce, or if this payout could be used for investment purposes such as buying a home or RRSPs, it may make sense to take the payment in lieu of.
On the other hand, if you have a long, stellar career ahead of you, with the possibility of promotions and pay increases to come, or if you do not have a particular short term goal for the payment, it may be best to let the funds grow along with your career to fund your long term plans.
This article was prepared by Elizabeth Summers, who is a Financial Planner with TD Waterhouse Financial Planning, a division of TD Waterhouse Canada Inc. and a subsidiary of The Toronto-Dominion Bank. TD Waterhouse Canada Inc. – Member of the Canadian Investor Protection Fund.
The information contained herein is for information purposes only. The information has been drawn from sources believed to be reliable. Where such statements are based in whole or in part on information provided by third parties, they are not guaranteed to be accurate or complete. The information does not provide financial, legal, tax, or investment advice. Particular investment, trading, or tax strategies should be evaluated relative to each individual’s objectives and risk tolerance. TD Waterhouse Financial Planning, The Toronto-Dominion Bank and its affiliates and related entities are not liable for any errors or omissions in the information or for any loss or damage suffered.
By Elizabeth Summers CFP FMA FCSI