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Financial planning in the wake of retrenchment

Ten critical steps to take to avoid making errors that can cost you later on.

As the lockdown restrictions ease somewhat, many companies have been left counting their losses and assessing the damage caused by the destructive second wave of the pandemic. Very few businesses have been left unaffected by the lockdown and widespread retrenchment is both inevitable and devastating. If you’ve recently been retrenched or facing imminent retrenchment, take decisive steps when it comes to your financial planning to avoid making errors that can cost you later on.

1. Check your employment contract

The process of retrenchment necessitates that a series of consultations between employer and employee be held, following which a severance agreement is reached between the two parties. While this process is strictly set out in terms of the Labour Relations Act, remember to check the terms set out in your employment contract. In terms of labour legislation, you are entitled to one week’s pay for every year that you have been employed, although it is quite possible that your employment contract makes provision for a greater retrenchment benefit. Before signing or agreeing to any severance package, be sure to know exactly what you are entitled to in terms of your contract. As part of your retrenchment payout, your employer must pay all benefits that are due to you including leave pay, overtime, commissions, incentives, bonuses and retirement fund monies. They are also required to provide you with all the necessary forms and documentation so that you can submit a claim to the UIF.

2. Decide what to do with your retirement benefits

If you’ve been contributing towards your employer’s retirement fund, you need to make decisions regarding this money. Your retirement money, known as your ‘retrenchment benefit’, includes any money in your employer’s occupational funds, either a pension or provident fund, but excluding individual retirement annuities. While the first prize would be to preserve your accumulated retirement funds, this may not be possible in circumstances where you have lost your job and do not have any firm employment prospects. However, before making a decision to withdraw the full amount, keep in mind the tax consequences of doing so.

On retrenchment, you have the option to preserve, withdraw or transfer – all with various tax consequences. If you choose to preserve part or all of your retirement benefits, it’s comforting to know that you have a number of options available for consideration. Firstly, if the fund rules allow, you may choose to keep your money invested in your employer’s retirement fund until you reach the fund retirement age. You may also choose to transfer the money tax-free into a preservation fund, with the added bonus that you are allowed to make a one-off lump sum or partial withdrawal from the fund before you reach age 55, subject obviously to tax.

If you choose to transfer the money tax-free to a retirement annuity, keep in mind that you will not be permitted to access the funds until you reach age 55. It is important to consider all options available to you before making a final decision. Specifically, you will need to take into account factors such as tax, your available emergency funding, your short- to medium-term job prospects, the value of your severance package, and your proximity to retirement.

3. Be strategic about your severance package

Your severance package is separate from your retrenchment benefit (retirement fund benefits) and includes the one week’s pay for every year worked and all other monies owing by your employer as a consequence of your employment. From a tax perspective, your severance package will be taxed in the same manner as your retrenchment benefits, with tax being calculated on the combined value of your retrenchment benefits and severance package. This means that the first R500 000 of the combined value of these two benefits will be tax-free, with the next R200 00 being taxed at 18%.

Once again, your personal circumstances will dictate how best to utilise this capital following your retrenchment. For instance, if you have expensive debt that is mounting and causing sleepless nights, you may do well to use these funds to settle your debt. If you need the money to cover your living expenses while you look for alternative employment, you may want to consider moving the money into an interest-bearing account. Most importantly, this money must be viewed holistically as part of your strategic financial plan while you navigate your way through ‘crisis mode’.

4. Reassess your life and disability cover

If you’ve enjoyed group life and disability cover as a result of your employment, remember that this cover will fall away as soon as your retrenchment takes effect. Long-term insurance is highly complex and it is advisable to seek advice from an independent advisor when reviewing your cover. Firstly, check whether your group life cover offers a continuation option which is effectively a cost-effective benefit that allows you to continue your cover in your personal capacity after leaving employment without the need for underwriting. If not, let your advisor help you determine what level of cover you need to ensure that your risk is sufficiently protected. Remember, if you cancel your cover outright, if you reapply for cover at a later stage you will need to be re-underwritten and this could result in exclusions and/or premium loadings. If you have an income protection benefit in place, get clarity from your insurer as to what happens if you need to claim in the period between being retrenched and finding a new employment opportunity.

5. Review your medical aid

If you need to come off your employer’s medical aid, remember that you have a window period of 90 days in which to register on another medical scheme, failing which you will be underwritten and potentially have waiting periods and/or condition-specific exclusions applied. If you are concerned about the cost of medical aid, consider downgrading your plan option to something more affordable. The idea is to retain uninterrupted medical aid membership, even if it means moving to the cheapest plan option. As your financial circumstances change, you will have the opportunity to upgrade to a more appropriate option.

6. Undergo a ruthless budgeting exercise

Cutting costs should be a number one priority, but make sure you do it with immediate effect. Don’t allow weeks to pass by before you start cutting back expenditure. The idea is to put an emergency budget in place to ensure that only the essentials are covered. If you are contributing to a unit trust RA or any discretionary investments, consider putting these investment premiums on hold while you are unemployed. You can always restart them at a later stage when you are confident of a regular income.

7. Employ your emergency funding wisely

If you have some emergency funding in place, employ a realistic strategy for this money. Having cut your budget, you should have a clear idea of how much you need to cover your essential living expenses. If necessary, prioritise your expenses so that you are clear in your mind which ones take precedence.

8. Claim from UIF

Log onto www.uif.co.za and submit your UIF claim as soon as possible. To do this, you will need the Section 189 letter issued by your employer together with your identity document and bank account details.

9. Speak to your credit providers

Be proactive about contacting your home loan, vehicle and other credit providers. Do not wait for your repayments and debit orders to bounce before approaching them for financial assistance. Most banks and financial institutions will help structure a financing solution to tide you through a period of unemployment. If you have a credit card or retail debt, check whether there is credit life insurance attached to the facility which covers your instalments in the event of retrenchment.

  1. Hustle

Do not be afraid to hustle. Find every opportunity to generate some form of income, be creative and innovative, and investigate whether you can monetise a hobby or passion of yours. The pandemic has given rise to a multitude of ingenious and creative businesses that, but for the virus, would probably never have been started. Find ways to turn your crisis into an opportunity.

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