Taking a buyout offer
Some employers may offer you a one-time amount of money if you leave your job voluntarily when your employer is downsizing or making changes to their business. Employers call this a buyout offer.
A buyout isn't the same as severance pay, which your employer may have to pay you if you lose your job through no fault of your own.
A buyout package may also include benefits. For example, it may include extended health and dental insurance.
How much money your employer offers you depends on:
- how long you've worked for your employer
- your salary
Read your buyout offer carefully. Ask any questions you may have before signing any buyout agreement.
For every benefit your employer offers you, be sure you understand the following:
- what your employer will cover as part of the buyout offer
- how long coverage will last
- what fees or premiums you’ll need to pay to get coverage
In some cases, you may be able to negotiate parts of your buyout offer with your employer. For example, you may negotiate longer health insurance coverage.
If you’re at a later stage in your career, you may consider using a buyout offer as a chance to take early retirement. Your employer may even offer a buyout package that lets you access your pension benefit payments right away.
It’s important to consider how you’ll manage financially if you take early retirement.
Make sure you consider the following:
- how early retirement will affect your pension
- where your other retirement income will come from
- what living expenses you'll have during retirement
- if you'll be able to live off a reduced income
You may choose to speak with a financial advisor to help you decide whether to take early retirement.
Rejecting a buyout offer
Buyout offers are voluntary. You may say no to the offer.
Sometimes layoffs follow buyout offers. Before rejecting a buyout offer, check to make sure you’ll get severance pay if you lose your job at a later date. Check if the buyout offer will give you more money and benefits than severance pay will.
If your employer is in serious financial difficulty, consider the buyout offer carefully. If the employer becomes bankrupt, it may be more difficult to get your severance pay.
Buyout offers and your pension
How a buyout offer will affect your pension depends on the type of pension you have. Ask your employer for an estimate of the pension income you’ll get if you take the buyout offer.
Defined contribution pension plan
In defined contribution pension plans, you and your employer pay a set amount into your pension plan each year. Any money earned by your investments goes into your pension account.
If you take a buyout offer, you’ll get:
- the money you contributed to the plan
- the money your employer contributed to the plan
- any interest made by the investments within your plan up to the time you leave your job
This means that if you take early retirement, you may not have had enough time to build up the funds you’ll need in retirement. You may need to work longer to save more money for retirement.
Your buyout offer may include a lump-sum payment to your defined contribution pension plan. This would increase the amount in your pension fund, and make your future pension benefit payments higher.
Defined benefit pension plan
In defined benefit pension plans, your employer promises to pay you a set amount of money after you retire. Usually both you and your employer contribute to the plan.
How much you get as pension benefit payments depends on:
- your years of service
- your annual salary
- your age
Usually, you need to work until your company’s retirement age to get the maximum benefit payments. This means that if you take a buyout offer, you may receive a smaller pension income than if you had worked to retirement age.
The difference between this reduced pension and a full pension can be large. Your buyout offer may include extra pension benefit payments. These may help cover your household expenses until you reach the usual retirement age.
Talk with your pension plan administrator about how to invest your pension until retirement.
Paying tax on your buyout offer
How you pay income tax on your buyout offer depends on how you get the money.
You may get the money from your buyout offer as:
- a lump-sum payment
- a salary continuance, that is, where your regular pay and benefits continue for a limited time after you lose your job
- deferred payments, that is, where you receive the money over two or more years
Paying income tax on your buyout offer is similar to paying income tax on severance pay.
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