GUIDES: Retrenchment planning in a bad economy

By Vickie Lange Time of article published Aug 1, 2019

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The South African economy is struggling somewhat and the impact of slow growth is now being felt by some companies who have begun retrenching or talking about retrenching employees.

It is therefore important to educate yourself about the impact of retrenchment on your financial well-being and what to do if you lose your job.

If you are retrenched, you will be entitled to a severance package, of at least one week's pay for every completed year of continuous employment with your employer.

Retirement fund implications

Because retrenchment means leaving your employer, you also have to decide what to do with your retirement savings in the employer's retirement fund. You can preserve your savings by:

* Leaving your retirement savings invested in that fund.

* Moving all your retirement savings to your new employer’s fund, a preservation fund, or a retirement annuity fund.

You can also take all or a part of your retirement savings in cash, but then you won't be able to earn the income you need when you retire. Cash taken out will also be taxed.

According to the 2018 Alexander Forbes Member Watch analysis, on average around 9percent of employees who leave their employers kept their retirement savings invested in their existing fund, their new employer's fund or a preservation fund. In addition, over the past three years, 89percent of members who were retrenched from their employers cashed in their retirement savings.

Not keeping retirement savings invested when moving from one job to another (for whatever reason) is one of the biggest contributors to poor retirement outcomes in South Africa.

A misconception of preservation is that the money is simply kept without earning investment returns and won’t grow - this is not true. A lump sum transferred to a preservation fund or left in a former employer’s fund will grow with investment returns.

Tax implications

Everyone is given once-in-a-lifetime tax relief of R500000 on their retirement lump sum. Note that a retrenchment severance package is considered and taxed as a retirement lump-sum benefit. Therefore, if you are retrenched and receive a severance package, the first R500 000 (of the combined severance and any retirement fund benefit paid out) will be taxed at 0percent (so, it’s in effect tax free). Any further cash balance taken is taxed at the retirement tax table rates. However, this tax benefit will be exhausted and cannot be used again at retirement.


* Get counselling

Retrenchment is a financially and emotionally stressful experience. Consider counselling before making any major financial decisions. Many financial decisions will be made, and budgeting and cutting costs are unavoidable.

* Keep paying medical aid contributions and insurance premiums

These are essential and can prevent further financial distress should something else unexpected happen. Ensure you and your family are on a medical aid option that meets your needs. Rather reconsider any luxury goods and services or cut back on wasteful expenses.

Vickie Lange is the head of Institutional Best Practice, Alexander Forbes.


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