EUGENE ANTAK: Losing your job need not be the end of the world
When it comes to the severance package your employer may pay you, it is important to understand the implications
Retrenchment can be devastating as it affects your financial security and your sense of worth. And it is not uncommon in times like these, when the economy is in recession and employers cut expenses such as salaries by letting people go or putting them on shorter hours.
Remember, the current trend is that people no longer remain in the same job for more than five years. Most people will have more than one career in their lifetime.
When it comes to the severance package your employer may pay you, it is important to understand the implications, especially regarding tax. Seek financial advice and plan the best use of your package.
You should never raid your retirement savings as this is a short-term strategy with long-term implications
You are likely to lose your group life benefits. Establish whether there is a continuation option and if you can afford the premiums. This is usually only possible for up to 30 days after your contract has been terminated by your employer.
Alternatively, consider new risk cover.
If you have your own risk policy, it might be necessary to inform your insurer about a career change.
For example, if you were an accountant and have now qualified as a pilot, the risk will be assessed differently.
Be honest about your retrenchment. Ensure that you understand why the retrenchments took place, assess whether the termination was legal and what obligations your former employer has.
Do not panic.
Start networking immediately. Update your CV. Make use of social media networks. Apply for work and potential opportunities by registering on job websites and make your CV searchable so that companies can find you. Obtain a reference from your employer, including the reasons for your retrenchment.
If necessary, contact your creditors to restructure your repayments. Apply for UIF, and assess your medical scheme options with a view to moving to a cheaper one until your circumstances improve. You can do this at the end of the year. Buying down need not compromise your cover if you go with an option that limits you to using designated doctors or hospitals.
You should never raid your retirement savings as this is a short-term strategy with long-term implications. Penalties could be imposed by the product providers and withdrawals may have tax implications (see below).
Usually, being out of work is temporary, so try to maintain your insurance and when you have a job again put away as much as you can to make up shortfalls. Using your emergency savings is an appropriate way to manage your expenses without incurring debt.
Live below your means and keep debt to a minimum. Whether you are living off your severance pay or your emergency savings, you may need to cut back on your expenses or take on part-time work. You may also use this time to develop your skills by taking courses or volunteering your services in an area where you might learn new skills.
If you're retrenched and have retirement savings, you have the following options:
- Take 100% of your fund benefit in cash; or
- Transfer 100% to an approved preservation fund, a retirement annuity or the new employer's fund; or
- A combination of the above.
Any cash withdrawal will attract tax according to the prescribed table. The first R25,000 of your first withdrawal is taxed at a zero rate and the balance is taxed between 18% and 36%.
Any cash withdrawal has a negative effect at retirement as this will change the tax rate of a lump-sum withdrawal at retirement.
The first R500,000 of only the initial severance benefit is taxed at a zero rate according to the prescribed table. Any amount above will be taxed between 18% and 36%.
This does not apply to pro-rata bonuses, severance notice or leave pay. Severance benefits refer to any lump sum received due to the relinquishment, termination, loss or repudiation of employment.
It is advisable to preserve your pension benefits at resignation as this locks in your retirement savings and you pay no tax on this transfer.
Note that regulations are being implemented to promote the preservation of retirement benefits.
Antak is a certified financial planner at Ultima Financial Planners in Pretoria