Sure you have seen these headlines:
South Africa is going through, what some are calling, a Black Swan event. In essence, a Black Swan event is when the planets have aligned, but this time it is not in your favour. I am not going into the economics discussion in this article as it is far reaching and more competent people will give you a clearer perspective.
Over the last few months I have worked alongside many clients, friends and family members who have either had their income decreased or been retrenched.
The same questions have come up again and again, and I want to address the most important discussion points around retrenchment.
Voluntary (voluntary severance package) versus involuntary retrenchment:
You need to understand something about retrenchment. It is not you that caused this, it is a decision made by your employer. Retrenchment is a form of dismissal due to no fault of the employee. It is a process where the employer reviews its business needs in order to increase profits or limit losses, which leads to reducing its number of employees.
Typically the Voluntary Severance Package (VSP) route is one offered by an employer with a “sweetener”. The VSP is often given to a larger group of employees in order for them to decide to leave. A sweetener could be “you receive 1.5 weeks for every year worked rather than 1 week”. I have seen instances where medical aid is paid for a period of time as well. With the VSP, you potentially give up your right to apply for a job at your employer once they “get back on their feet”.
The retrenchment route is a little more brutal. You are being told that the company needs to make cuts in order to survive. You don’t get a choice in taking it and there is no “sweetener”.
How do I get paid when I am retrenched:
You should receive a severance benefit depending on how financially solid the company is at that time. An employer typically applies to SARS in order to apply the retrenchment tax tables, which is exactly the same as the retirement tax tables. Your severance package is not taxed according to your marginal tax rate bands, and is completely separate from your marginal tax calculation. Once you know what you will be getting paid, you can use the SARS website to calculate (on a sliding scale) how you are affected. I don’t like using other firms, so check out SARS under the heading “Retirement & Death Benefits or Severance Benefits”:
Payout of your pension or provident fund:
Please, if at all possible, do not cash these benefits out until you need them. Speak to your retirement fund and ask if they can be retained as a “paid up” benefit. Using this route reduces costs as you will be paying institutional costs rather than retail. Furthermore, you benefit from no initial fees, and if you do use a financial advisor who is accredited on the fund, the ongoing advice fee is often lower than going into a separate preservation investment. There is also WAY less paperwork to do this, and we all know that extra paperwork during a stressful time only leads to additional, unwanted stress.
WARNING! If you decide to make use of proceeds due to you from the pension or provident fund, you could be subject to tax! Typically on retrenchment you receive R500 000 tax free (as per the sliding scale noted above). What many people do not realise is that the retrenchment table is used for both the severance package AND the payout of your pension/provident fund.
EXTRA WARNING: The R500 000 tax free portion is cumulative across retrenchment and retirement. The sliding scale used includes any retirement products that you might retire from. So, if you are over 55 and wanting to access your preservation investments and retirement annuities, the R500 000 portion could be used and you would then start being taxed on every Rand paid out according to the sliding scale.
Below are just a few tips to remember during this stressful period:
1. Tick the right option. This may sound simple, but many people rush through the withdrawal forms and tick “resignation” instead of “retrenchment”.
2. Adjust your budget as best as you can
3. Speak to insurance companies and look at reducing cover or obtaining quotes from other providers to decrease those costs
4. Contact your bank and look at possible “payment holidays”. Read the terms and conditions!
5. Register your UIF claim
6. Don’t burn your bridges
7. Stay calm
I hope this assists you somehow. There is a lot of emotion and noise around this traumatic experience.
Be safe and good luck.