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How to retrench-proof your finances

Retrenchment insurance usually pays out 75% of your taxable salary for up to six months.
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Low GDP growth and a struggling economy has resulted in many South African companies resorting to retrenchment as they try to trim costs wherever they can to stay profitable.

Investec chief economist Annabel Bishop says GDP growth in 2020 will likely be closer to 1% than 1.5% year on year. In the past month, the International Monetary Fund (IMF) has warned that it projects South Africa’s “economic growth to remain sluggish in 2020 — below population growth for the sixth consecutive year … With low growth and low job creation, the increasing labour force is projected to exacerbate unemployment pressures, poverty, and inequality.”

This sets the scene for a bleak economic outlook as we head into the new year.

In the last year alone, more than 20 000 South Africans have been retrenched and this is set to increase next year.

Read: Banks continue quietly cutting staff

If you have managed to retain your job, it might well be time to consider how you can retrench-proof your finances so that you have a financial cushion if you happen to receive a retrenchment letter from your employer.

Read: How to deal with your home loan when you get retrenched

Retrenchment insurance

The good news is that you can take out retrenchment insurance when you take out an income protection policy, or you can ask your insurer to include it as an add-on when you take out life insurance.

Retrenchment insurance usually pays out 75% of your taxable salary for up to six months.

In order to claim on retrenchment insurance, you must prove that your retrenchment was in line with labour law requirements. This means that your retrenchment must be subject to certain conditions, for example, adverse business conditions, a restructuring within the business or the introduction of new technology.

The fine print: exclusions

When you take out any new financial services product, you should always read the fine print to ensure that you understand the exclusions on the policy. Most retrenchment insurance policies will have similar exclusions.

You cannot claim if:

  • You resigned or are fired
  • You took a voluntary retrenchment package
  • You have declined a reasonable offer for an alternative job from either the employer that retrenched you or another potential employer, or
  • You are self-employed, a director or an independent contractor, or employed by a family member.

There are also certain conditions you must satisfy before you can claim. These include a waiting period, which may vary from one month to six months, depending on your insurer. The waiting period commences from the date you receive your final salary. You must be permanently employed for at least a year with the same employer before you claim.

Which companies offer retrenchment insurance?

Kresantha Pillay, lead specialist: lifestyle protector at Liberty Group, says the company launched a retrenchment insurance product, the Liberty Retrenchment Protector, in 2011. 

Pillay notes that the Liberty Retrenchment Protector is one of the few benefits in the market that is not linked to a life cover policy. “The payout is not linked to your salary but rather on the amount of cover taken out. You can select to have inflation-linked premiums where your premium and cover amount increase each year, or you can choose a level premium.”

In terms of the premium payable, she provided the following example, adding that premiums will vary between individuals, depending on their individual profile. A 30-year-old male, non-smoker, employed as an actuary with an after-tax income of R30 000 per month who has taken out R1 million life cover and opted to have the maximum retrenchment cover for 75% of his after-tax income, would pay a R234 monthly premium.

  • Old Mutual Green light policies offer retrenchment insurance as part of their ‘lifestyle adjustment cover’, where you can protect your income from R3 000 to R30 000, up to the age of 65.
  • Frank.net offers retrenchment cover for up to six months.

Other forms of retrenchment assistance

  • Absa offers a ‘credit protection plan’, which will pay 10% of your average outstanding credit card balance or loan for four months if you are retrenched.
  • ooba – this mortgage originator includes a retrenchment benefit as part of its credit life policy offering for your home loan.
  • Liberty Investments – a premium waiver for six months.
  • First for Women – a premium waiver benefit for up to six months.

Bleak economic outlook

Innocent Dutiro, former CEO of workplace solutions company Adcorp, notes that the economy’s labour intensity has been dropping steadily.

He says that in the 25 years prior to 1995, a percentage point of economic growth was associated with a 1.3% increase in employment. In the 25 years since 1995, a percentage point of economic growth has been associated with a far lower 0.2% increase in employment.

“To put it another way, in 1995, it took 7.3 workers to produce R1 million of output. Today, it takes 4.4 workers to produce the inflation-adjusted equivalent – a drop in the economy’s labour intensity of 39.7%.

“Economic growth is certainly helpful for employment growth, but it is not a panacea.”

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You need the retrenching Financially Fit course. Dr. Debt

My last salary was in Feb 2006. (..and my retirement is still years away). Since then, I survived on the principle of freedom.

As Robert Kiyosaki quoted in many of his books, you’ve made the life decision to “exchange financial security for freedom”.

(But ‘freedom’ has its responsibilities. It does not mean spending less time at work. You exchange one boss for multiple bosses! 😉 But it provides immeasurable satisfaction.)

Being retrenched can be the best gift a 40-year+ slave can receive.

Given the extensive opportunities to build viable offshore businesses online, anyone can retire in 5 years.

We are teaching teenagers how to never HAVE to work a job for 40+ years and subject themselves to slavery; how they can be free to CHOOSE & PURSUE their passion.

End of comments.

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