If you’re facing retrenchment or are currently in discussions with your employer, you’re likely dealing with a number of potentially life-changing decisions that must be made timeously and with care. As a complex and highly regulated process, it’s essential to understand your rights, the steps involved, and the financial implications. In this article, we address some of the most commonly asked questions.
Do I need legal advice?
Yes. It’s advisable to consult a labour lawyer at the outset to ensure your rights are protected and that you receive everything owed to you. The Labour Relations Act strictly governs the retrenchment process, and your employer is required to follow due procedure and pay all amounts due in terms of legislation and your employment contract. It can be more difficult and costly to challenge an unfair retrenchment after the fact than to get the right advice upfront.
Will my income protection policy pay out?
No. An income protection policy is long-term insurance cover that pays a pre-determined amount—usually a percentage of your taxable income—if you are temporarily or permanently unable to work due to illness or injury. It does not provide cover if you lose your income due to retrenchment.
What happens to my group life and disability cover?
In most cases, your group life and disability cover will fall away once your retrenchment takes effect, so it’s important to secure cover in your personal capacity. The underwriting process can be lengthy, particularly if medical underwriting is required—so begin the process as soon as possible. Check with your HR department whether your group policy offers a continuation or conversion option, which would allow you to take out a similar individual policy without undergoing medical underwriting, bearing in mind that this option generally needs to be exercised within two months.
How do severance packages and retrenchment benefits differ?
It’s important to distinguish between your retrenchment benefit and your severance package, especially in terms of tax treatment and withdrawal options. If you belong to a group retirement fund, the amount in that fund is classified as your retrenchment benefit. Your severance benefit refers to the cash payout you receive as a result of retrenchment—legislated at one week’s remuneration for each completed year of service in terms of labour law. You may also receive payouts for overtime, bonuses, commission, leave, or other benefits. These are payments for services rendered and are taxed at your marginal rate, whereas severance and retrenchment benefits may qualify for preferential tax treatment.
Should I get financial advice?
Yes. The decisions you make regarding your severance and retrenchment benefits can significantly affect your financial future and getting it wrong can lead to unnecessary tax. An independent financial planner can guide you through your options and help you make informed decisions.
What should I do with my retirement savings?
With the introduction of the two-pot retirement system effective 1 September 2024, your options regarding retirement savings have evolved. Broadly speaking, you can withdraw, preserve, or combine both strategies. Contributions after the implementation date are split into a ‘savings pot’ which is accessible before retirement, and a ‘retirement pot’ which must be preserved until retirement. Pre-existing savings fall into a ‘vested pot’ and follow the old rules where you may withdraw your retirement funds upon retrenchment, with the first R27 500 is tax-free while with the rest taxed according to the withdrawal tax tables.
Your decision should consider factors such as emergency savings, job prospects, and overall financial position. With the introduction of two-pot, if you withdraw from your savings pot, the amount accessed will be taxed at your marginal rate.
At your retirement, the first R550 000 of your combined severance and retirement benefits remains tax-free, with the rest taxed according to retirement tables. To preserve your capital, you can leave funds in your employer’s fund (if allowed), transfer to a preservation fund (which permits one pre-retirement withdrawal), or move to a retirement annuity (which allows contributions but generally no access before age 55). The two-pot system brings added flexibility but also calls for careful planning and personalised financial advice.
What should I do with my severance payout?
Consider your personal circumstances before deciding how to use your severance package. While first prize would be to invest your funds, this may not be practical particularly if you’re the primary breadwinner. If you have emergency savings to cover a few months’ expenses, you might place your payout in an interest-bearing account while planning your next move. If you’re confident you won’t need access in the near future, investing more aggressively could be appropriate. Remember that SARS considers all previous taxable withdrawals when calculating your R550 000 tax-free amount.
What becomes of my medical aid membership?
If you are on your employer’s group medical aid scheme, your membership will cease once your retrenchment is finalised. If the company uses an in-house scheme, you will need to join an open medical scheme. With a large number of open medical schemes in South Africa, the choice can be overwhelming, so consider working with an independent healthcare adviser. If your group scheme is already with an open medical aid provider, you can remain on it in your personal capacity. Act quickly though—any break in membership longer than 90 days could result in penalties, exclusions, or waiting periods. If affordability is a concern, you could downgrade to a network option. Remember, you can upgrade again at the start of the new calendar year.
Is it a good idea to borrow money to stay afloat?
Generally not. Personal loans and credit are costly and should not be used to fund living expenses. If you lack adequate emergency funds, you may need to use your severance payout to cover costs while seeking new employment. Most importantly, don’t treat your payout as a windfall—take a cautious approach. Cut unnecessary expenses and adopt temporary austerity.
What if I can’t pay my home loan?
Most banks are willing to assist customers facing financial hardship, so communicate proactively with your lender. Ask about options for restructuring your bond. Some banks offer retrenchment cover with home loans, which pays your instalments for up to six months—but be aware that this doesn’t apply to overdue payments. If you have this cover, submit your claim and required documents as soon as you’re retrenched.
Have a fabulous day!
Sue
