This year has been a tough year for some. There wasn’t a week that has gone by in the last 6 months where I haven’t received a call or e-mail from a client or a potential client that has been retrenched, and it doesn’t surprise me given that South Africa’s unemployment rate is looming towards the 30% mark. One must also not assume that retrenchments are taking place only in the mining sector given the challenges within that sector. Most sectors of our economy are affected .
When one is faced with retrenchment, there is a huge emotional rollercoaster ride that they will go through as they come to the sudden realisation that there is no regular income in the immediate future to pay monthly household bills and school/university fees, furniture, car and home repayments, buy groceries, etc. Finding another job is also not easy given the current economic environment, and the first thing that clients want to do is cancel their life assurance policies as affordability becomes an issue. The second thing will be rendering their retirement annuities paid-up followed by the cashing out their corporate retirement fund benefits when exiting the fund. The fourth and final thing will be taking a partial or full withdrawal from their existing preservation funds as they need cash to supplement their immediate lifestyle costs.
I have thus decided to give you 10 tips that you can use to deal with this unforeseen situation a little more efficiently from a financial planning perspective:
- Retrenchment would be a good reason to dip into your emergency fund (if you have one) to help you get through this rough period. Remember, it is advisable to have at least 3 months’ worth of income saved up in an emergency fund (this is usually a cash/income fund that is accessible within a week).
- Ask your financial planner to confirm or investigate if your risk policies have a waiver on premiums in the event of you being retrenched and to confirm the terms and conditions of that waiver. If your policy does have this waiver and your circumstances qualify you to claim from this benefit (you will need to produce a UIF card), your risk premiums will be borne by the insurer on your behalf for a certain period of time (usually 12 months) which allows you to still be covered for death, disability, or dread disease whilst you get your affairs in order giving you peace of mind. Some life insurance-based retirement annuities may also have this waiver so that your contributions are then borne by the insurer on your behalf and there is no penalty fee imposed on the accumulated capital by the insurer to recoup their cost like there would be if you did not have this waiver.
- One can consider taking out cover to protect one’s income in the event of retrenchment for up to six months but this is capped at R 30 000 per month and is a relatively expensive feature on risk policies.
- You may land a contract role soon after being retrenched and this may come without group benefits. If your existing corporate retirement fund has a continuation option on risk (death, disability, dread disease, and funeral) benefits, consider taking the benefits you need in your personal capacity as the medical underwriting process is quite limited (usually subject to just an HIV and nicotine test). Most insurers allow you between 30 and 60 days from the date of exiting the fund to exercise this option. The premiums for the same level of cover will however be re-rated based on your individual demographic factors such as your gender, age, smoker status, highest academic qualifications, occupation, annual income, etc. It could end up being cheaper or more expensive than the premium that was being paid on the corporate retirement fund.
- If you have a unit trust-based retirement annuity, you will not incur a penalty on the capital amount by making your contributions paid-up. The accumulated lump sum will still grow based on the performance of the underlying funds. When you are ready to start making contributions again, it is not a hassle to re-instate the contributions.
- Transfer your corporate retirement fund capital into a preservation fund rather than cashing it out at the date of exit from your employer. You will not incur any tax liabilities in doing so and should you need to access these funds at a later stage, you will be eligible to make one withdrawal before age 55, either partially or in full, but subject to the tax that applies to retirement fund withdrawals. If you do secure employment shortly after being retrenched and cashed out your corporate retirement fund, you would have incurred an unnecessary tax liability that has implications further down the line in terms of your tax-free exemptions allowed when you do reach normal retirement age.
- If you are retrenched on an involuntary basis and you receive a severance pay out, ask your employer to apply for a tax directive on the severance pay so that you qualify for the R 500 000 tax-free exemption that applies to individuals at normal retirement age even if you are below the age of 55. But remember, if you do this, you will not be allowed any further tax-free exemptions from retirement withdrawals when you do decide to retire after the age of 55 (assuming that you use up the full exemption when you get retrenched).
- If you decide to take your corporate retirement fund as a withdrawal over and above your severance pay, please note that SARS combines the severance pay and retirement fund together in their calculation of the tax-free exemption allowed.
- SARS will not grant the R 500 000 tax-free exemption for individuals if they opt for voluntary retrenchment. Those over the age of 55 who opt for voluntarily retrenchment but with the intention to retire early will however qualify for R 500 000 exemption.
- If you are over the age of 55, early retirement may seem like an attractive option whereby you can convert your corporate retirement fund and personal retirement annuities and preservation funds into an annuity/pension income stream, but please bear in mind the longevity risk that you are taking as you will be reliant on this income stream for a much longer period of time than you would have if you retired at your normal retirement age. Inflation will start to erode the buying power of your income a lot sooner than you think if you don’t select a prudent draw rate (assuming that you opt for a living annuity as opposed to a guaranteed life annuity).
The days of having a job for life are over. Your financial plan should have robust features built in to it for you to successfully manage your affairs should you come face-to-face with the harsh realities of retrenchment so as to not compromise your situation any more than it has been.