If you’re facing a retrenchment or are in the process of retrenchment discussions with your employer in South Africa, it’s likely that you face a set of potentially life-changing decisions which need to be made timeously and with great caution. Being a highly-regulated and complex process, it’s important to fully understand the process, your rights, and the financial implications going forward.
In this article, we tackle some of the most frequently asked questions:
Should I seek legal advice?
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Yes, ideally seek advice from a labour lawyer at the start of the retrenchment process to ensure that your rights are protected and that you are paid what is rightfully owed to you. The retrenchment process as set out in the Labour Relations Act is strictly regulated and your employer is required to ensure that due process is followed and that all monies owing to you in terms of legislation and in terms of your employment contract are paid. It is likely to be more costly and difficult to challenge your retrenchment after the fact than to employ the services of a legal professional upfront.
Does my income protector payout on retrenchment?
No, an income protection benefit is a long-term insurance cover designed to pay out a pre-determined rand amount (generally a percentage of your taxable income) if you are either temporarily or permanently disabled as a result of injury or illness. It does not payout in the event that you lose your income as a result of retrenchment.
What happens to my group life and disability cover?
Generally speaking, your group life and disability cover will fall away once your retrenchment takes effect, so it is important to take steps to secure cover in your personal capacity. Remember, applying for life insurance can be a time-consuming process – especially where there are several medical underwriting requirements – so it is important to start looking for replacement cover as soon as you are aware of your retrenchment. Ask your HR representative whether your group life cover includes a continuation or conversion option that effectively permits you to take out a similar individual policy without being medically underwritten. There is normally a window period of around two months in which to exercise this option, so be sure to find out whether you can convert to this option.
What is the difference between a severance package and a retrenchment benefit?
When going through a retrenchment, it is important to understand the difference between your retrenchment benefit and your severance package, and the tax and withdrawal options in respect of these benefits. If you have been contributing towards your group retirement fund, the lump sum invested in that retirement fund is regarded as your retrenchment benefit for tax purposes. Your severance benefit is the cash payment that you are entitled to as a result of your retrenchment which, in terms of labour legislation, is equal to one week’s pay for each year of completed service. It is important to understand how these funds will be taxed before deciding on what to do with these benefits. On retrenchment, you may also be entitled to payments in respect of commissions, bonuses, overtime pay, leave or other incentives. Remember, these funds are in respect of services rendered and, as such, do not fall within the definition of severance benefits and will be taxed at your marginal rate.
Should I seek financial planning advice?
What you decide to do with your retrenchment and severance benefits can significantly affect your financial future, and making the wrong decisions can result in you paying unnecessary tax. As such, it is always advisable to seek the guidance of an independent financial planner who can guide you through the available options and associated tax implications.
What are my options in respect of my retirement benefits?
Broadly speaking, you have the option to withdraw or preserve your retirement benefits or implement a combination of the two. Depending on your financial position – including factors such as the level of your emergency funding and the likelihood of finding alternative employment – you may decide to withdraw all or part of your retirement benefits on retrenchment, but be sure to understand the tax implications of doing so. In the case of retrenchment, the first R500 000 of your combined severance and retirement benefit will be free from tax. Thereafter, any cash withdrawn will be taxed as per the retirement tax tables.
If you choose to preserve your funds, you have a number of options to choose from. If your employer’s fund rules make provision, you can elect to leave your funds in the retirement fund where it will continue to enjoy investment growth until your formal retirement. Another option is to transfer the capital into a preservation fund which is a great option if you think you may need access to your money prior to retirement. Preservation funds allow investors to make one full or partial withdrawal from the fund before formal retirement, subject to tax – although, on the downside, you cannot make additional contributions towards your preservation fund. On the other hand, if you choose to transfer the funds into a retirement annuity, while you will not be able to make any withdrawals before age 55, you can make additional contributions to the fund going forward.
What should I do with my severance package?
Before deciding how to employ your severance package, give careful consideration to your unique personal circumstances. While investing these benefits is first-prize, it will not always be possible – especially if you are the sole breadwinner and don’t have a spouse’s income to fall back on. If you have adequate emergency funding in place to cover the costs of your living expenses for a couple of months, then you may wish to place your severance package in an interest-bearing account until you have greater certainty. If you are confident that you won’t need to access the funds in the short-to-medium term, investing these funds more aggressively may be an option. Remember, your severance benefit will be taxed as per your retirement benefit with the first R500 000 being tax-free. When calculating your tax-free portion, bear in mind that Sars will take into account all previous taxable withdrawals, retirement benefits and severance benefits you have received into account.
What happens to my group medical aid cover?
If you are a member of your company’s group medical scheme, your membership as part of the group will come to an end as at the date of your retrenchment. It is therefore important to be proactive about finding out what options are available to you in terms of membership going forward. If your company runs an in-house, private medical scheme, you will need to apply for membership in an open medical scheme. There are currently 18 registered open medical schemes to choose from and you may find the available options overwhelming, so consider using an independent healthcare advisor to guide you through the process. If your group membership is already with an open medical scheme, you can remain on that scheme but in your personal capacity. However, do not delay in sorting your membership out as any lapse in membership that exceeds 90 days can result in you being penalised with late joiner penalties, exclusions and waiting periods. If you are worried that you won’t be able to afford your medical aid premiums, consider downgrading your plan option to a network option that generally offers more favourable premiums. Keep in mind that you can always upgrade your medical aid plan option at the beginning of each calendar year.
Should I borrow money to help cover my living costs?
Borrowing money in the form of a personal loan or from a credit provider is generally expensive, and it is never a good idea to use debt to fund your living expenses. If you do not have access to emergency funding, you may need to use your severance benefit to help cover your living expenses while you look for alternative employment. That said, don’t view your severance package as a fortuitous windfall, but rather take a more considered approach when utilising these funds. Be ruthless with your budget by slashing all unnecessary expenditure, while reminding yourself that these austerity measures are only temporary. Consider all options when it comes to cutting costs, including moving to more affordable accommodation, downscaling your vehicle, or selling it all together with a view to using e-hailing services until you can afford to buy a new car. This will remove your vehicle repayments and car insurance from your budget which can help create much-needed breathing room.
What happens if I can’t make my bond repayments?
Generally speaking, banks are willing to help home loan customers who have fallen into financial hardship, but be sure to proactively communicate your situation with your bank. Speak to your bank about the options available in respect of restructuring your home loan. Some financial institutions offer home loan insurance which includes a six-month retrenchment cover meaning that your home loan repayments will be paid by the insurer during this period. However, note that this cover is not applicable to home loan arrears, meaning that you would need to claim from the policy before you find yourself in a position where your home loan repayment bounced. As soon as you are retrenched, make sure that you lodge your claim with all supporting documentation.