Employee Benefits Insight

Retrenched? Where to from here?

Unfortunately, given the turbulent time we are in, retrenchment has become a reality for many. Although often unexpected, is there a way to rebound from such a traumatic and disruptive event?

Once the initial shock of being retrenched is over, it is very important to reassess your situation and take proactive steps to get things back on track. This is something one should not do alone as emotions can cloud your judgement. The valuable input from an objective third party can assist in giving you valuable guidance and helping you regain control of your situation.

Understanding your retrenchment package and the amounts you will receive or have access to
When you are retrenched, the first step will be to understand what your retrenchment package is made up of and the different amounts you will be receiving or have access to. The amounts that you will receive or have access to at retrenchment are usually made up of the following:

• normal income
• severance benefits
• retirement fund benefits

The amount received as normal income usually includes your last salary, notice pay, leave pay etc. This is usually then taxed at your marginal income tax rate (between 18% and 45%).

Your severance benefit is a lump sum paid to you by your employer. The Basic Conditions of Employment Act gives guidance as to what one should receive, which is a minimum of one week’s remuneration for every completed year of service. Your severance benefit can only be taken as a lump sum and will be taxed according to the retirement lump sum tables, together with all previous retirement fund lump-sum benefits received.

Your retirement fund benefit is the actual fund value of your pension and/or provident fund. At retrenchment you have different options on what you can do with your retirement fund benefits, including:

• accessing the funds by taking the full benefit as a cash lump sum
• transferring the full benefit to a qualifying retirement fund
• taking a portion of the benefit as a lump sum and transferring the balance to a qualifying retirement fund (if the rules of the fund permit this)

Note that any amount taken as a cash lump sum will be taxed according to the retirement lump-sum tables, together with any severance benefits or retirement lump sums taken before, whereas any amount transferred to an approved retirement fund will be transferred tax free.

You will need to carefully assess your different options and how they can affect your retirement savings. It is important to consider not just your immediate circumstances but also your long-term plans.

Understanding the tax implications of withdrawing from your retirement fund
Let’s have a look at a practical example. Lisa (50) has just been retrenched and received a severance benefit of R600 000. She also has a pension fund valued at R2 650 000. Lisa is in the unfortunate position of not having an emergency fund or any other savings and has no guidance as to what she should do with her retirement benefits or how to proactively regain control over her situation. She opts to take the full value as a cash lump sum.

The full cash lump sum taken amounts to R3 250 000 (being the severance benefit of R600 000 and the pension fund value of R2 650 000) and will be taxed according to the retirement tax lump sum table:

Lisa will pay tax of R922 500 and only receive R2 327 500 in her pocket. The tax is something Lisa could have avoided or limited if she had preserved her retirement fund value by transferring it to an approved retirement fund. With the necessary guidance, Lisa could have proactively planned her next steps going forward without making such a large withdrawal from her retirement savings. She could have rather wisely used her severance benefit to cover her expenses during the uncertain period.

Preserving your retirement savings
Ideally, you should try not to dip into your retirement savings for unforeseen events, but rather make use of your emergency fund. By not taking a lump sum in cash, you avoid paying additional taxes, preserve your savings for your actual retirement and stick to your savings goals. Your retirement funds can be transferred either to:

• your new employer’s qualifying retirement fund
• a preservation fund (i.e. PSG Wealth Preservation Fund)
• a retirement annuity (i.e. PSG Wealth Retirement Annuity)

If Lisa had transferred her pension fund value of R2 650 000 to an approved retirement fund instead of cashing it out and paying taxes, the difference towards her savings for her actual retirement over the long term would have been significant (more than R2 million). Comparing the two actions, the difference in savings at retirement can be depicted as follows:

Practical tips to rebound from retrenchment

• Proactively take control and reassess your position:

• Review your monthly budget – make a list of your expenses and assess what you can cut back on.
• Read just your financial and savings goals, even if it is just for a short period of time. Evaluate what you have saved and see how you can adjust specific future goals.
• Re-evaluate your skillset and ability to find a new job. Then plan your next steps to start earning an income in order to continue saving.

• Make sure you have a trusted sounding board. Speak to your financial adviser for guidance and valuable input on the different options available to you at retrenchment.
• Use your retrenchment package wisely. Instead of spending it all, consider saving a portion for another rainy day. Maintain your emergency fund and stick to your long-term savings goals.
• Should you consider using your funds to start a new business, only do so if you have done proper research and discussed this with a business mentor/coach. Not all of us are natural entrepreneurs and starting a business out of panic could lead to a further downfall.
• Have a plan. The famous saying goes: “if you fail to plan, you plan to fail.”