What you need to know and do if you are facing retrenchment
Getting professional financial advice to help you sift through your options will pay off
The poor state of the South African economy has resulted in many organisations reviewing their cost structures. Some local companies have already begun retrenching employees, with others indicating their intention to start the process. If you are in the unfortunate position of facing retrenchment, it is critical to have the presence of mind to carefully consider your options.
Focusing on the long-term may not be easy once you have been retrenched. But it’s important to get professional financial advice tailored to your circumstances and it will pay off in the years to come.
The Basic Conditions of Employment Act requires that a severance package be paid to retrenched employees at a minimum of one week’s salary for every year of service.
From March 1 2011, the Income Tax Act was amended to allow for severance benefits to be taxed according to the retirement tax tables, provided that certain requirements were met. Leave pay, pro rata bonuses and final salary do not form part of the severance package and are taxed according to normal income tax rates.
The investment value of your company retirement fund might well make up the bulk of your wealth. The temptation to take cash from your retirement fund will be high during this time of uncertainty, but remember that any cash you take from your retirement fund will have to be replaced or you may end up short in retirement.
You may elect to preserve your retirement fund benefit. The transfer into a preservation fund is tax-free, as well as offering the flexibility of withdrawing from the preservation fund prior to your retirement. If you have been retrenched and are struggling to secure new employment, the flexibility this option provides is valuable.
Some retirement funds’ rules have been amended to allow for a deferred option, which means that you can leave your retirement fund invested until you retire. This option allows your retirement fund to grow while you live off your severance package and any other savings you may have accumulated.
If you are older than 55, you may consider early retirement. If your company retirement fund is a pension fund, you may take up to a third as cash, while if your company retirement fund is a provident fund, the entire amount may be taken as cash. Remember that, in both instances, it is only the first R500,000 that is tax free.
The South African Revenue Services aggregates all lump sums withdrawn from retirement funds. This includes all withdrawal lump sums taken after March 1 2009, all retirement lumps sums after October 1 2007 and all severance benefits after March 1 2011.
The tax on the aggregated lump sum is then calculated according to the retirement fund lump sum table. It is worth noting that the tax-free amount is available only once. So, if you have already used it, any additional lump sums are then taxed according to the sliding scale.
Medical scheme membership is often an area that is overlooked. If you do not pay your contributions your membership will be terminated
The remaining portion may then be used to purchase a pension. Some retirement funds may provide a pension from the fund itself. It will be key to ensure that the historical increases from the fund at least keep pace with inflation. Some retirement fund rules allow for members to transfer a portion of the retirement fund out to invest in a living annuity from an external provider and purchase a pension from the fund. Another option is to invest the entire portion in a living annuity with an external provider.
Members of retirement funds may also have group life and disability benefits. Some retirement funds will have a conversion option on these benefits, which allows you to convert the cover into an individual policy free of medical underwriting.
The conversion option needs to be exercised within a set time limit (usually 30 days depending on the fund) or the option expires. This is a valuable benefit especially if you have health problems and obtaining cover in your personal capacity would have been problematic.
Medical scheme membership is often an area that is overlooked. If you do not pay your contributions your membership will be terminated. This can lead to late-joiner penalties on your contributions for the rest of your life. If you are on a restricted or closed scheme with your company, the scheme may allow you to continue to be a member until you become a member of another scheme. Open schemes will not cancel your membership because of your retrenchment (as long as you continue to pay your premiums).
• Bezuidenhout is director and investment planner at Netto Invest (email@example.com).