How to rebound after job loss:
a financial checklist

Whether you saw it coming or were blindsided, losing your job is traumatic. It’s not just about losing your source of income, it’s also about a loss of status, daily routine and sense of purpose.

But job loss doesn’t have to mean losing everything. Here is a checklist to help keep your financial life on track as you navigate this transition. 

Step 1: Evaluate your severance package and understand the tax impact. 

If you’ve been offered a severance package, don’t feel pressured to sign it immediately. Make sure you review and understand the terms offered and get legal advice from an employment lawyer to avoid making decisions that could impact your financial future.

How you pay tax on the income you receive as part of a severance package depends on how it is structured.

Salary continuance
If you receive a salary continuance, your pay and benefits will continue for a set period of time. You’ll be taxed as usual, and the usual deductions like Canada Pension Plan (CPP) or Quebec Pension Plan (QPP), and Employment Insurance (EI) premiums will continue to apply.

Lump-sum payment
If you receive a lump-sum payment, your employer will deduct income tax but not Canada Pension Plan (CPP) contributions, Quebec Pension Plan (QPP) contributions or EI premiums. You can also request that they transfer this amount in full to your RRSP or Registered Pension Plan (RPP). In this scenario, you’ll only pay tax on the money when you take it out of the account.

Extended severance
In some cases, an employer could allow you to spread your severance over two or more years. Doing this may lower the amount of income tax you’ll owe each year. 

Step 2: Make decisions about your company retirement savings.

Pension
If you have a company pension plan, your employer will send you a letter outlining your options, depending on whether you have a defined contribution pension plan (DCPP) or defined benefit pension plan (DBPP). 

When you leave a job with a DCPP, you can: 

• Transfer your pension money to invest it in a locked-in retirement account (LIRA) – since the funds come from a registered pension there are certain restrictions on withdrawal limits and timing, but you would have the ability to transfer the existing savings to a LIRA with the financial institution of your choice 
• Leave your pension where it is and collect your monthly benefit when you turn age 65.
• Buy an annuity.
• Cash it out if it’s a very small amount. 

When you leave a job with a DBPP, you can:

• Transfer your pension to your new employer’s defined benefit pension plan if they have one.
• Leave your pension in your current employer’s pension plan – you’ll receive a pension benefit when you retire. 
• Take the “commuted value” of your pension money and invest it elsewhere. A portion can be transferred to a LIRA and a certain portion may be received as taxable income on receipt. The amount that is considered taxable is based on your age at the time of commutation.

Deferred Profit-Sharing Plan (DPSP)
Once you’re no longer employed with the company, you can choose to: 

• Transfer your DPSP to an annuity, RRIF or RRSP – transferring directly to an RRSP defers taxes, particularly if you hold a large amount in your DPSP.
• Cash out the amount – you’ll have to report it on your taxes and pay income tax at time of withdrawal.

Step 3: Look into health plan benefit options

Your former employer may have provided a health benefits plan that you participated in. This plan could include coverage for things like prescription medications, dental and vision care, as well as additional services like chiropractic, physiotherapy or massage. While many employers allow access to health benefits for a few months after you’ve lost your job, if you anticipate being out of work for a length of time, you may want to consider a personal health plan that can provide many of the services you feel you need. This could be more cost-effective than having to pay out-of-pocket for these expenses. 

Step 4: Review your insurance options

If your condition is covered, a critical illness policy can provide some financial relief so you don’t have to draw on any savings. And while you’re unemployed and your household is experiencing a loss of income (even if it’s temporary), double check whether your existing life insurance coverage is adequate.

Step 5: Review your budget and expenses. 

Take a look at your expenses, think about where you may be able to cut back during this transition period and find ways to stretch your savings. Analyze your complete financial situation – including savings, investments and debts – to understand your baseline. This will help you develop a path forward as you consider the next stage of your career.

Step 6: Explore income sources

It generally takes about 5 or 6 months to secure new employment depending on your experience, field of expertise and demand for your industry.  In the meantime, look for ways to fill in the income gap. 

Employment Insurance (EI) benefits
While it won’t replace your salary, EI can provide up 55% of your salary up to a maximum of $668 per week, for up to 45 weeks after job loss for individuals who meet the eligibility requirements.  Be sure to apply as soon as possible. Receiving a severance package means you won’t receive EI payments until your severance period has expired. But at that point, if you haven’t yet secured a new job, your EI payments can begin without a pause.

Borrow from your life insurance policy
If you have whole life insurance (a type of permanent life insurance that provides your beneficiaries with a tax-free payment after you die), your policy may include a savings portion called the cash value. A portion of the premiums you pay go towards building this cash value, which grows tax deferred. However, you may have the option to borrow against it or withdraw the amount which could help provide a buffer if you need cash flow while you are unemployed. There may be tax implications, so talk to us before deciding to take this approach.

Access your emergency fund (if you have one)
If you have an emergency fund, this is the situation in which to use it. Once you’ve found new employment, be sure to build up your funds once again.

Other options
Consider other sources of income including your TFSA, lines of credit or other borrowing options, stock incentives or selling taxable investments. We can help you understand the various tax implications and trade-offs of these options. 

 

We can help

Losing your job can feel overwhelming, but we can help. We’ll work to create a budget, find income options that make sense and help keep your financial plan on track.

Talk to us.