Retrenchment: Your questions answered

Retrenchment is widely recognised as one of life’s most stressful events. The shock of a retrenchment coupled with financial stress may leave a person uncertain about how to proceed. Here are some answers to frequently asked questions about retrenchment:

What’s the first thing I should do if I get retrenched?

If your employer has given you notification that they intend embarking on a retrenchment procedure, you may want to consider getting legal advice from an experienced labour lawyer. Before agreeing to or signing anything, take steps to determine your rights as an employee and to understand your employer’s obligations through the process. Secondly, take immediate steps to put a survival budget in place and to strip out any unnecessary costs. There is no knowing how long you may be unemployed for so rather err on the side of caution and be ruthless with your budget. Rather than doing mental arithmetic interspersed with some guesswork, commit to drafting a written budget which will empower you to know exactly how much you need each month to survive and can help allay some of the anxiety.

What payouts am I entitled to?

In terms of legislation, you are entitled to be paid at least one week’s pay for each completed year of ongoing service. Having said that, bear in mind that your employment contract or the company’s retrenchment policy may provide greater retrenchment benefits than provided by legislation so be sure to check the detail. Your employer is also obliged to pay you in respect of any leave that you have not yet taken, notice pay, or any pro-rata share of any bonus, commission or incentives that were due to you.

Can I register a claim with UIF?

If your employer has been contributing to UIF on your behalf then you will be able to register an online claim at Alternatively, you can go to your nearest Labour Office and complete a hard copy claim form.

What happens to my company medical aid?

If you belong to your company’s open medical scheme you can stay on your medical aid but will need to make arrangements to take over the payment of the premiums. If your company provided you with a medical aid subsidy, this subsidy will fall away when your employment comes to an end, and you will be responsible for paying the full premium. If your employer runs a closed medical scheme (i.e. where membership is restricted to employees only), you will need to move off the medical aid and join an open medical scheme, but will need to ensure that you are not left uncovered for more than 90 days. If you are not a member of a registered medical scheme for a period of 90 days or longer, you may be subject to waiting periods and/or exclusions when re-applying for membership.

Does my group life cover fall away?

If your group life cover does not provide employees with what is called a ‘continuation option’, then your group cover will fall away when your employment ends. Speak to your company’s HR manager to determine whether the group life policy allows you to convert the cover into your own name in the form of a continuation option. Exercising the continuation option means that you won’t need to be medically underwritten which often results in premium loadings or exclusions. Generally speaking, insurance companies provide departing employees with 60 days in which to exercise their continuation option.

What happens to my income protector?

If you exercise your continuation option and it includes an income protection benefit, be sure to check with your insurer as to the status of this benefit. Generally speaking, an insured can only claim for loss of income as a result of illness or injury if he is employed at the time which may mean that you will not qualify for a claim as a result of your unemployment. Each insurer has their own set of rules in this regard, so it is best to ask for clarity before making a decision. While you may be tempted to cancel this benefit if you find that you are not covered while unemployed, consider the fact that you will need to be re-underwritten at a later stage if you wish to reinstate this benefit, and this could result in certain conditions being excluded from cover or your premiums being loaded.

How will my severance benefit be taxed?

Once you and employer have come to agreement on your severance benefit, keep in mind that the Income Tax Act allows more favourable tax treatment of these benefits. The first R500 000 of your severance pay, being a combination of your severance benefits and retirement benefits, is free from tax. The next R200 000 is taxed at 18%, and the following R350 000 at 27%. Any amount over R1.05 million is taxed at 36%. Remember that these tax rates apply over lifetime, so when you ultimately retire from your retirement funds you may have already used the R500 000 tax free portion when your received your severance package, so you would not be eligible for any further tax free lumpsums.

Do I have to preserve or re-invest my retirement funds?

No, you have a number of options available to you with regard to your retirement funds, although preserving or re-investing your retirement funds would be first choice. However, everyone’s circumstances are different and you need to make a decision that will ensure you can survive financially while seeking employment. You have the option to withdraw your retirement funds in full, with these funds being taxed at the above-mentioned rates, bearing in mind that your retirement benefits form part of your severance pay. If you have a sizeable amount invested in retirement funds, and in the absence of any emergency funding, you may want to consider making a tax-free withdrawal sufficient to cover your living expenses for the next three- to six- months If you choose to preserve part or all of your retirement money, there are a number of options available to you. Firstly, if the fund rules allow, you may leave your money into your employer’s retirement fund where it will continue to enjoy investment growth until you formally retire from the fund. Secondly, you may transfer the funds to a preservation fund or a retirement annuity in your own name. Thirdly, if you are fortunate to have found new employment, you may have the option to transfer the funds to your new employer’s fund.

Should I put my investments on hold?

If you are contributing towards other investments, you may want to consider putting these contributions on hold for a while to help with cashflow. Specifically, if you are contributing towards discretionary investments such as a unit trust portfolio, money market fund or tax-free savings account, stopping your contributions will be as easy as issuing a written instruction. Similarly, if you contribute towards a retirement annuity on a unit trust platform, you can stop your premiums at any stage without any penalties or fees being charged. If, however, you have a policy RA in place, do not stop your contributions before checking with your insurer what the implications of doing so will be as many traditional policies charge penalties for early cancellation.

What if I can’t make my bond repayments?

Make immediate contact with your bank if you are in any way unsure about your ability to make your home loan repayments while you are unemployed. Banks are not in the business of re-possessing homes and are generally very accommodating where customers find themselves in financial distress. Do not wait for your home loan repayment to bounce before contacting the bank. Rather, be proactive, open and upfront about your circumstances, and work with your bank to find a solution which may include restructuring the home loan or providing a payment holiday.

Who should I notify about my retrenchment?

Besides for your home loan provider, be proactive about communicating with any service provider with whom you have financing or credit. Check with your credit providers if your credit life insurance provides cover in the event of retrenchment. If you have maintenance obligations towards minor children, it is only fair to let their guardian know that you are no longer earning an income. Ideally, come to an agreement regarding the payment of maintenance rather than allowing the matter to drag to maintenance court.

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