Nowadays it can happen to anyone: dismissal! If there is a dismissal for business economic reasons, the dismissal is attributable to the employer and there is a breach of the conditions of the employment contract . The principles on which the employment contract was entered into cannot be maintained by the employer, which means that the only option is dismissal in the event of reorganization. The employment contract for an indefinite period is therefore terminated by means of a termination agreement. Part of this termination is compensation for breach of contract in the form of a severance payment or golden handshake. What options do you have to use your severance pay?
Severance pay
- Amount of severance pay
- Spring Accord
- What to do?
- Repaying current loans
- Just save
- Bank savings or annuity
- Get yourself informed
Amount of severance pay
Usually the severance pay is determined by the subdistrict court judge, using the subdistrict court formula. This formula is made up of the following elements:
- amount of severance pay = A x B x C x D including;
- A = the number of years of service the employee has worked;
- B = the gross income per month. If the salary has changed in the past year, the gross income over the last twelve months will be averaged;
- C = an adjustment for the age of the dismissed employee. Up to the age of 35, this is 0.5, after which it increases by 0.5 every ten years to a maximum of 2 for employees over 55 years of age;
- D = a correction for the reason for dismissal. For collective dismissals, a factor of 1.0 usually applies, unless the employer cannot provide any aggravating arguments in this regard.
Spring Accord
The Spring Agreement states that the severance payment will be reduced to a quarter of the monthly salary with a maximum of 6 months. Compared to the old arrangement in accordance with the subdistrict court formula, this is of course a considerable deterioration in dismissal law, especially for older employees. It is also stated that the severance payment must be used for retraining, so that in practical terms there is no severance payment left under the new plans. The question is therefore whether this trend will be adopted after the elections or whether there will be changed plans. This could mean that dismissal law will be overhauled, resulting in a reduction in severance pay.
What to do?
If you are entitled to severance pay, this can amount to quite a lot. The question for you is therefore to answer in advance what you want to do with the small capital. Certainly, for those who have worked for the employer for a long time and are already of a relatively high age, the severance payment can be considerable. If the amount is paid directly into the account, you have to pay a lot of tax on it. The question is whether you still have outstanding loans when choosing what to do with them.
Repaying current loans
After dismissal for business reasons, you will receive unemployment benefit and you are therefore entitled to benefits. That benefit is already a reduction in your income. It is therefore necessary that you save on all your expenses. An important step to take is to use the severance payment to pay off outstanding loans. You usually pay a relatively high interest on personal loans, revolving credits or private loans. Save on this immediately, so that your interest costs per month decrease or you no longer have to pay interest. If there is still part of the severance payment left, or you have no current loans, you can do the following:
Just save
If you simply save, the amount will first appear in your checking account, which on balance means that it is considered income. The employer therefore immediately pays a large part of the tax. In addition, interest payments on savings accounts are currently dramatically low. So, in practical terms, saving yields nothing. Inflation is also even higher than the interest payment, which means that after saving for so long, you can buy relatively less with the amount of money than if you do it now. Saving is safe in itself, but it yields nothing. What alternative is there to use your small wealth wisely?
Bank savings or annuity
Save for later by depositing the remaining gross amount of the severance payment into a bank savings account or annuity policy. You do this if you do not need the small capital at the moment, so that you can actually save for later. The severance payment is paid gross into the annuity policy or bank savings account on which no tax is levied. You immediately save up to 42% in levies with scale 3, which is a good start to a nice capital later in life. The basic principle is that the amount is set aside for the long term, so that it can grow strongly through interest on interest. This growth of capital within bank savings or annuity is exempt from levies by the tax authorities.
Get yourself informed
If you will soon receive severance pay, it is important to think in advance what you are going to do with it. If you need the amount immediately, you can have it paid out to your checking account. The disadvantage is that you pay a lot of tax and that in itself is a shame. If you don’t need it, you can save for later. Through the bank savings account or annuity policy you can build up capital for:
- stop working earlier before you retire;
- work less in the last years of your working life;
- additional income or assets in addition to the pension.
Always be informed about the options for what to do if you are going to receive severance pay.
read more
- Fictitious notice period in case of dismissal with mutual consent
- Being collectively dismissed: what are you entitled to?
- Dismissal rights: what are you entitled to if you are dismissed?
- I’m resigning! What are the consequences of resigning?