Financial planning in the wake of retrenchment

Critical steps to take to avoid making errors that can cost you later on

As the lock-down restrictions ease somewhat, many companies have been left counting their losses and assessing the damage caused by the destructive second wave of the pandemic. Very few businesses have been left unaffected by the lock-down and widespread retrenchment is both inevitable and devastating. If you’ve recently been retrenched or facing imminent retrenchment, take decisive steps when it comes to your financial planning to avoid making errors that can cost you later on.

  1. Check your employment contract

The process of retrenchment necessitates that a series of consultations between employer and employee be held, following which a severance agreement is reached between the two parties. While this process is strictly set out in terms of the Labour Relations Act, remember to check the terms set out in your employment contract. In terms of labour legislation, you are entitled to one week’s pay for every year that you have been employed, although it is quite possible that your employment contract makes provision for a greater retrenchment benefit. Before signing or agreeing to any severance package, be sure to know exactly what you are entitled to in terms of your contract. As part of your retrenchment payout, your employer must pay all benefits that are due to you including leave pay, overtime, commissions, incentives, bonuses and retirement fund monies. They are also required to provide you with all the necessary forms and documentation so that you can submit a claim to the UIF.

  1. Decide what to do with your retirement benefits

If you’ve been contributing towards your employer’s retirement fund, you need to make decisions regarding this money. Your retirement money, known as your ‘retrenchment benefit’, includes any money in your employer’s occupational funds, either a pension or provident fund, but excluding individual retirement annuities. While the first prize would be to preserve your accumulated retirement funds, this may not be possible in circumstances where you have lost your job and do not have any firm employment prospects. However, before making a decision to withdraw the full amount, keep in mind the tax consequences of doing so.

  1. Be strategic about your severance package

Your severance package is separate from your retrenchment benefit (retirement fund benefits) and includes the one week’s pay for every year worked and all other monies owing by your employer as a consequence of your employment. From a tax perspective, your severance package will be taxed in the same manner as your retrenchment benefits, with tax being calculated on the combined value of your retrenchment benefits and severance package. This means that the first R500 000 of the combined value of these two benefits will be tax-free, with the next R200 00 being taxed at 18%.

  1. Review your medical aid

If you need to come off your employer’s medical aid, remember that you have a window period of 90 days in which to register on another medical scheme, failing which you will be underwritten and potentially have waiting periods and/or condition-specific exclusions applied. If you are concerned about the cost of medical aid, consider downgrading your plan option to something more affordable. The idea is to retain uninterrupted medical aid membership, even if it means moving to the cheapest plan option. As your financial circumstances change, you will have the opportunity to upgrade to a more appropriate option.

  1. Undergo a ruthless budgeting exercise

Cutting costs should be a number one priority, but make sure you do it with immediate effect. Don’t allow weeks to pass by before you start cutting back expenditure. The idea is to put an emergency budget in place to ensure that only the essentials are covered. If you are contributing to a unit trust RA or any discretionary investments, consider putting these investment premiums on hold while you are unemployed. You can always restart them at a later stage when you are confident of a regular income.

  1. Employ your emergency funding wisely

If you have some emergency funding in place, employ a realistic strategy for this money. Having cut your budget, you should have a clear idea of how much you need to cover your essential living expenses. If necessary, prioritize your expenses so that you are clear in your mind which ones take precedence.

  1. Speak to your credit providers

Be proactive about contacting your home loan, vehicle and other credit providers. Do not wait for your repayments and debit orders to bounce before approaching them for financial assistance. Most banks and financial institutions will help structure a financing solution to tide you through a period of unemployment. If you have a credit card or retail debt, check whether there is credit life insurance attached to the facility which covers your installments in the event of retrenchment.

Financial success starts with good saving habits. Our Financial Experts have been unpacking and providing practical advice on the best ways to preserve YOUR financial freedom. Contact our Financial Advisors to ensure that you are receiving Shariah-Compliant Finance advice.

Anglowealth is an Authorized Financial Service Provider (FSP Number: 46755)

Source: (Moneyweb, 2022)


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