Financial Fundamentals ~ make an informed choice when you are retrenched
The word RETRENCHMENT sends shivers down the spines of many, and you just have to look up the definition to understand why.
“…the reduction of costs or spending in response to economic difficulty or the action of making an employee redundant.”
As the definition explains, retrenchment is an unfortunate outcome as a result of operational and business needs. It brings uncertainty with respect to employment and secure income. An employee may be retrenched through no fault of their own, so it is important to understand the process. Labour law permits employers to dismiss employees for operational requirements, and in an emerging market like South Africa, business restructures are common practice. This may lead to planned job shedding, which is often followed by interventions by unions and possibly even strike action.
Retrenchment affect’s a person’s self-confidence and self-esteem which is exacerbated by the fear of not being able to support one’s family. Whether you feel completely secure in your job or not, understanding the impact of retrenchment on your retirement savings and planning for its possibility is a smart choice.
Only a small percentage of South Africans are able to retire comfortably and this is due to insufficient savings during their working careers and choosing to withdraw their benefit when changing jobs. For the majority, a company retirement fund is our only means of saving for retirement and it is crucial that this money remains invested throughout your working career.
Should you consider taking a cash option, be cautious as it is almost impossible to make up for this investment loss due to investment influences like inflation, loss of compound interest, time out of the market place and general apathy when it comes to planning for retirement.
It is very important to understand your options and understand the implications of your decisions when faced with this experience.
Retrenchment Withdrawal Options from your company retirement fund
- Transfer to your new employer’s retirement fund
- Transfer into your existing or new retirement annuity fund
- Transfer into a registered preservation fund
- Invest within the retirement fund’s preservation option
- With draw your retirement benefit in cash, subject to tax
- Withdraw part cash, subject to tax and transfer the balance to a preservation fund.
Retrenchment and Taxation
- Transferring your benefits
This is the wisest option, no tax is payable if you transfer to a new employer fund,Retirement Annuity fund or a Preservation fund (certain conditions apply). To enjoy this tax neutral transaction, you must transfer to a fund with the same or more restrictions as the source fund.
- Benefits taken in cash
Important to note that a normal withdrawal cash benefit, from any approved retirement fund (where permitted by the fund rules) is taxed according to the current withdrawal lump sum tax table which is provided for in the Income Tax Act.
However, in the case of retrenchment and the benefit is taken in cash, the benefit (together with your severance benefit) is taxed in terms of the retirement lump sum tax table and not the withdrawal lump sum tax table.
With all these rules and regulations, it is best to consult with an authorised financial services provider to guide you in identifying your personal financial planning needs and making an informed decision.
Pros and Cons in a Nutshell
Retrenchment is a temporary set-back. And like most things in life, there are pros and cons with every decision you make. Make sure that this decision is the best for you.