Here’s a guide to help you understand key areas like your severance package, retirement funds, and financial planning to make informed decisions during this time.
The retrenchment package
Retrenchments, whether voluntary or involuntary, typically include a severance package. The basic calculation is one week’s salary for every year of service. Sometimes, in voluntary retrenchments, employers may offer higher amounts. Severance pay is taxable according to the Retirement Lump Sum Tax table, with a R550,000 tax-free threshold available if it hasn’t been used for previous retirement withdrawals. Once used, this tax-free amount cannot be reclaimed at retirement or in future retrenchments.
Leave pay
Any unused leave will be paid and taxed as regular income under PAYE. It’s important to check your employer’s leave policy, as some companies limit the number of days you can carry over.
Final salary and other payments (Notice Pay, Pro Rata Bonuses)
Your final salary will include all usual deductions. The final contribution to your retirement fund will be allocated the following month. Remember that group benefits such as medical aid may end unless your employer offers an extension. Speak to your financial planner to understand potential risks and how they impact your financial plan.
Medical aid
If you’re on a company medical aid scheme, you’ll need to transfer to private membership and take over the payments. This is a critical part of your budgeting, as gaps in coverage could lead to high medical costs, potential underwriting or joiner penalties. Explore your options early to ensure a smooth transition and prioritise this expense in your budget.
Budgeting: Time for a reality check
Creating a realistic budget is essential during this period. Start by listing all your fixed and variable expenses and see where immediate cuts can be made. Know what income will come in after taxes and deductions, as this may need to last several months. Consider creating a household budget if you’re married or in a partnership – reducing expenses, even temporarily, can help ease financial pressure. If necessary, talk to your bank about options for your bond or vehicle payments—it’s always better to negotiate before falling behind.
Once you clearly understand your needs relative to your resources, you can start making informed decisions and plans. Knowing how long you can sustain yourself will guide your timeline for finding new employment or adjusting your lifestyle.
Your retirement fund options
You have the option to withdraw up to 100% of your retirement fund, but this should be a last resort. Rebuilding these funds for your future can be extremely difficult, and the tax implications are significant, with rates as high as 36%. It’s better to preserve your fund, either with your employer’s fund or with another provider. Doing so means no tax is applied, and your future remains protected.
If you must take a lump sum, consult a financial planner to understand the long-term consequences and what will be required to replenish your retirement savings. Note that withdrawals can take several weeks to process, so ensure your short-term cash flow is manageable.
UIF Claims
If retrenched, you are eligible for UIF, though it will not cover your full salary. The payout is based on an average of your last six months’ salary up to a specific limit. You can use a third-party service to assist with the claim if you prefer to avoid the administrative process of applying through the Department of Labour. While the benefit may not replace your salary, it can provide short-term cash assistance while you seek new employment.
Review your financial plan
If you qualify to retire from your retirement fund, you could explore flexible alternatives to full-time work, such as drawing income from unit trusts or other investments. Partnering with a financial planner during this stressful time is crucial. Objective, unemotional advice can help you navigate your financial choices and make well-informed decisions.
Retrenchment is never easy, but by understanding your options, working with a financial planner, and taking proactive steps, you can navigate this transition more smoothly. Financial planners play a crucial role during emotionally charged times, offering objective guidance and helping you make clear-headed financial decisions for your future.
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