How to navigate your way through retrenchment
Debts such as medical scheme contributions, car and house payments, and school fees do not stop, but there are ways to manage your financial affairs to navigate through this time.
It is important to realise that retrenchment is not always a negative. Sometimes a voluntary retrenchment, accompanied by a package, can be a positive for some, particularly those who have been with a company for many years and are stuck in a job or salary rut. So don’t let your emotions cloud the decisions you need to make. This might be a great opportunity to work for someone else in the same industry for a higher salary, or to start a new career.
Do not panic. Retrenchment is an emotional journey, so speak to people and get advice. It does not have to be a scary journey. You need to take responsibility for your own situation, but you can get holistic help from a financial adviser. These professionals are not only around for the times when you have money to invest, but also to guide you through times when money is tight.
A financial adviser will look at your individual situation and advise you on which debts to pay off first. Your retrenchment package will be taxed in the same fashion as any money taken at retirement - the first R500 000 of your package is tax free, the next R200 000 is taxed at 18%, the next R350 000 is taxed at 27% and anything over R1 050 000 is taxed at 36%.
This benefit is a cumulative scale available once only in your life, either when you are retrenched or at retirement. Whatever cash you have to take from your package will use up the tax scale, and it will therefore not be available again at retirement.
The first thing to do is to draw up a budget. If you don’t have one, you won’t know how long your package will last and what the most important things are that you have to pay.
Do not cancel your medical scheme membership or insurance in case of unforeseen incidents. Your employer was probably paying, so don’t forget to instruct your medical scheme to change the payment details to your own so nothing falls through the cracks, leaving you without cover.
Look at your package. Hope you can use this as cash flow and find a job before you need to start using your retirement savings. Examine your circumstances. Will there be a penalty if you have a payment holiday on any of your accounts, or do you have retrenchment cover on any accounts?
Discuss with your bank whether or not you can reduce your home loan repayments. Find out the minimum you can pay, or if you can stop paying because you have saved extra in the bond. It is important to consider these options because it has a direct impact on your budget.
Be aware that you don’t have to accept your company’s first offer. The minimum package is one week’s salary per year you have been there. If you are on a defined-benefit pension fund, negotiate to waive possible early retirement penalties as part of your package. There is no guarantee this will be granted, but it is worth asking. Is there anything you would be due at retirement that you could ask for now, if you are close to retirement? Also, if you are retrenched halfway through the year and you were due a bonus, check that you get the half that is due to you.
An adviser can also guide you as you consider your future career options because he or she can look at the financial pros and cons.
Often, people have thrown away their retirement fund money on setting up a business in a field in which they have no experience.
You need to be careful of getting yourself into an even worse financial position - a business loan may be a better option than using your retirement savings.
Start saving again once you have a job to make up any losses that occurred because of the retrenchment. Look at your cash flow and budget, and don’t take food out of your mouth to try to keep putting money away while you don’t have an income.
Speak to your financial adviser to help with this part of your financial journey so you can make the best decisions for yourself and your family.
Rita Cool is a Certified Financial Planner at Alexander Forbes Financial Planning Consultants.