If you are retrenched, there are a number of significant financial decisions you will need to make that are entirely dependent on your personal circumstances. First prize is to seek the advice of an independent adviser who can help you navigate the intricacies and financial implications of retrenchment. Key decisions that need to be made include the following:
RETIREMENT FUND BENEFITS
When leaving your employment as a result of retrenchment, you will need to make important decisions regarding the money held in your employer’s pension or provident fund. A lump sum from a retirement fund as a result of retrenchment is regarded as a ‘retrenchment benefit’ for tax purposes if your loss of employment is as a result of your employer ceasing operations or becoming redundant as a result of general operational requirements. As retrenchment benefits are linked to loss of employment, they may only be provided in respect of occupational funds such as pension and provident funds, and not in respect of individual retirement annuities. The options available to you in respect of your retrenchment benefits are as follows:
While preserving your retirement benefits is always first option, in these trying economic times this may not be feasible and you may have no choice but to withdraw some or all of your money in order to make ends meet. If retrenched, you have the option to withdraw the capital in your employer’s pension or provident fund, although there are tax implications that need to be taken into account. Everyone is given a once-in-a-lifetime tax relief of R500 000 on their retirement lump sum, bearing in mind that a retrenchment severance benefit is considered and taxed as a retirement lump-sum benefit. Therefore, if you are retrenched, the first R500 000 of your combined severance and retrenchment benefit will be tax-free. Any further cash withdrawn will be taxed at the retirement tax table rates. It is important to bear in mind that SARS takes all previous taxable withdrawals, retirement (including retrenchment benefits) and severance benefits you have received into account. This includes severance benefits that accrued on or after 1 March 2011, and retirement lump sum benefits that accrued on or after 1 October 2007.
There are a number of ways in which you can preserve your retirement benefits following a retrenchment, and these include:
Leave in employer’s retirement fund: Assuming the retirement fund’s rules allow for it, you have the option of preserving your funds by leaving your money invested in the employer’s retirement fund where it will continue to enjoy investment growth until you reach formal retirement age.
Transfer to a preservation fund: You can choose to transfer your capital tax-free to a preservation fund, which is specifically designed to invest your pension or provident fund savings. An added benefit is that, provided you have not already made a withdrawal, a preservation fund allows you to make one full or partial withdrawal during your lifetime. One limitation of a preservation fund is that you cannot make additional contributions to this fund.
Transfer to a retirement annuity: Another option for preservation is to make a tax-free transfer of your pension or provident fund benefits to either an existing or new retirement annuity. An RA allows you to make additional monthly, quarterly, annual or ad hoc contributions to this fund, although it is important to bear in mind that you will not be able to access these funds until age 55.
Transfer to new employer’s fund: If you are fortunate enough to have found new employment, you can preserve your pension fund money by transferring it tax-free to your new employer’s pension fund. Please note, however, that there are tax implications if you transfer from a pension fund to your new employer’s provident fund, so be sure to get advice.
A ‘severance benefit’ is essentially the cash payment that your employer pays you as a result of your loss of employment. Our law provides that you are entitled to at least one week’s pay for each year of completed service, but it is important to check your employment contract as you may be entitled to more. Apart from your severance benefit, you will also receive any monies owed to you in respect of over-time, leave, commissions, incentives or bonuses. The tax treatment of a severance benefit is the same as in the case of your retrenchment benefits (i.e. withdrawal from retirement fund), bearing in mind that you will be taxed on a combination of both benefits. SARS will therefore consider the combined value of your severance and retrenchment benefits, with the first R500 000 being tax-free. Thereafter, the next R200 000 is taxed at 18%, the next R350 000 at R36 000 plus 27% of taxable income above R700 000, and any amount over R1.05 million is taxed at 36%.
You have a number of options regarding your severance benefits, and what you do with this money largely depends on your personal circumstances. If you are likely to need the money in the short term, rather put your cash in an interest-bearing account until you have more certainty regarding your future. Alternatively, you can consider investing this capital into a discretionary unit trust portfolio where it can achieve investment growth over the longer term. You might also want to use some of this money to settle debt and thereby reduce your monthly repayments, however it is important to find the right balance between paying off debt and ensuring that you have sufficient cashflow while you are looking for another job.
GROUP LIFE COVER
On retrenchment, you will lose the group life and disability benefits you had through your employer and this can leave you in a particularly risky position. First prize is to determine whether your group cover includes a continuation option which allows you to convert your group cover into a policy in your own name. There are significant benefits to exercising your continuation options which include the fact that you won’t need to be medically underwritten. This means that you will not have an exclusion or premium loadings due to certain pre-existing conditions and you will effectively be paying more favourable premiums than if you were to apply for individual life cover. It is also the least admin-intensive option which ensures no break in your insurance cover. In general, insurers provide you with 60 days in which to exercise your continuation option, so be sure to get advice as soon as possible. This may be an opportune time to completely review the levels of life, disability and severe illness cover that you require in order to ensure that you are adequately protected.
It is important to ensure that you remain on a medical aid and that your membership is not interrupted. A break in membership of more than three months can give rise to waiting periods, exclusions and late joiner penalties. If your company runs an in-house, private medical scheme, you will need to move off that scheme and onto an open medical scheme in your personal capacity. If you are on an open scheme through your employer, you can remain on that scheme but will be personally responsible for the payment of your premiums. If cashflow is an issue, you may want to consider downgrading your plan option.