Decisions facing the newly retrenched
Retrenchment is a financial and psychological shock that will be a reality for thousands more South Africans this year.
At least 9,000 people are set to lose their jobs in the coming months from companies that have made their policies known. More may happen less publicly.
If you are told your job is being made redundant, you'll be faced with an array of emotions and some complex decisions.
These financial dos and don'ts should help make the decision-making less overwhelming.
• Do check your rights in terms of the Labour Relations Act to, for example, a severance package of at least one week's pay for each year of completed service.
However, engage firmly but cordially with your employer. You never know when you may need a reference or may return for part-time work.
• Do scale back your expenses. Take a harsh look at what you spend and cut out everything but the necessities until you have secured a new regular source of income, says independent financial adviser Janet Hugo.
l Do claim unemployment insurance if you have been contributing. Even as a high earner, you will still get something out.
You have a year to apply and if you have been contributing for four years before you were retrenched, you can claim for up to a year while unemployed.
You can only claim benefits for an income of up to R17,712 a month. The Unemployment Insurance Benefit pays the first 238 days at a rate between 38% and 60% of your salary. If you had been earning R17,712 or more, it means a benefit of R6,730 a month for eight months.
From 239 to 365 days the benefit is a flat rate of 20% of your income up to a maximum of R17,712, or R3,542 a month if you had been earning the maximum or more a month.
• Do set aside your severance package, leave pay and pro rata bonuses in a money market or income fund that generates as much interest as possible without taking too much risk, as you will need to draw from it every month until you get a new income.
Your severance pay may seem a tidy sum, but use it only to draw the absolute minimum income because you do not know how long it will be before you find work again.
If you have an access bond on your home, consider investing in your bond, but think carefully about paying off other debts if you need your severance pay to replace your income. A paid-up home or car can't buy food or pay school fees.
If you have more than one car in your family, consider selling one to save costs until you're back on your feet, Hugo says.
• Don't give up your medical cover if you can. You can remain on an open scheme after you are retrenched but you will have to pay the full contribution.
If your scheme membership is restricted to a certain group, you will probably have to move to an open scheme.
If you give up your membership, you will not only lose cover you may need, but if you are off a scheme for more than three months, you could face a three- to 12-month waiting period on any existing condition, and late-joiner penalties if you are over the age of 35.
Late-joiner penalties are for life and most medical schemes are not sympathetic to the fact that you gave up your membership due to loss of income.
Consider downgrading to a cheaper option while you are unemployed. Most schemes will allow you to downgrade, or motivate for a downgrade, if the reason for doing so is a loss of income.
• Don't lose the cover you enjoyed through your group life and disability benefits if you can. Many schemes offer what are known as continuation benefits, which allow you to keep your cover in your own name if you pay for it.
This continuation cover can be cost-effective, especially if you are older and have some chronic conditions. Taking out new cover later could cost you dearly.
• Do check your credit life policies to see if you are covered for retrenchment. If you have any debt, like a home loan of less than R1m and a personal loan or store account taken out after August 2017, you will probably have credit life cover that provides for your repayments for 12 months if you are retrenched.
Although this cover does not necessarily pay off your debt when you are retrenched, it does protect you when you cannot service your loan, says Nkazi Sokhulu, CEO of Yalu.
• Do check your life and investment policies for retrenchment benefits/premium waivers. Some life and income protection policies offer income replacement after retrenchment for up to six months, but it is an expensive benefit and typically only available after a six-month waiting period.
l Don't spend your retirement savings unless you have to. You can leave retirement savings in your employer-sponsored fund while you live off your severance and leave pay.
Only when that is exhausted do you need to decide how much to draw from your retirement fund, and ideally you should preserve as much as you can.
Jenny Gordon, head of technical support at Alexander Forbes, says you can draw some of your savings and transfer the rest to a preservation fund. This will give you the option of making one further withdrawal - which could be all of your savings - if you still don't have a regular income.
If you preserve, you pay no tax, but your severance pay together with any amounts you withdraw from your retirement fund will be tax-free up to R500,000, Gordon says. This is assuming you haven't withdrawn benefits since 2007 or taken a severance benefit since 2011, as these amounts reduce your tax-free amount.
If your severance pay or the retirement savings you withdraw are more than that, tax rates from 18% to 36% apply, depending on how much you draw, she says.
If you later make a second withdrawal from a preservation fund, this will be regarded as a withdrawal and taxed from 18% to 36%, depending on how much you draw, she says.
If you are older, you may be given incentives to take early retirement - as a pension fund member you can withdraw one third with the same tax implications but the balance will have to be used to draw a pension, Gordon says.
• Don't underestimate the emotional cost. A 28-year-old professional retrenched unexpectedly last year commented on a business news website that his retrenchment was a "massively stressful, surreal, staggering and confidence-destroying" event that left him questioning his self-worth.
You need to cut your expenses to the bone, but investing in learning new skills or some life coaching that will help you regain your confidence, and networking that will lead you to work, could be a worthwhile investment, Hugo says.