How to retrench-proof your finances

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Government imposed lockdown restrictions have wreaked havoc on economies around the world. This has exacerbated the numerous challenges South Africa was already facing before the onset of the pandemic, including elevated unemployment and a highly constrained fiscus, says Annabel Bishop, chief economist at Investec.

She notes that the unemployment rate which climbed to 30.1% in the first quarter of the year is forecast to reach around 37.9% in the second quarter of this year as many businesses have had to shut their doors permanently or downscale their workforce. “However, the full effect of the pandemic on employment numbers will only be established over time as unemployment is a lagging economic indicator,” Bishop says.

In 2019 alone, more than 20 000 South Africans were retrenched and this is set to increase next year. If you have managed to retain your job, it might well be time to consider how you can retrench-proof your finances so that you have a financial cushion if you are retrenched.

Retrenchment insurance

The good news is that you can take out retrenchment insurance when you take out an income protection policy, or you can ask your insurer to include it as an add-on when you take out life insurance. Retrenchment insurance usually pays out 75% of your taxable salary for up to six months. In order to claim on retrenchment insurance, you must prove that your retrenchment was in line with labour law requirements. This means that your retrenchment must be subject to certain conditions, for example, adverse business conditions, a restructuring within the business or the introduction of new technology.

The fine print: exclusions

When you take out any new financial services product, you should always read the fine print to ensure that you understand the exclusions on the policy. Most retrenchment insurance policies will have similar exclusions. You cannot claim if:

  • you resigned or are fired;
  • you took a voluntary retrenchment package; or
  • you have declined a reasonable offer for an alternative job from either the employer that retrenched you or another potential employer;
  • you are self-employed, a director or an independent contractor or you are employed by a family member.

There are also certain conditions you must satisfy before you can claim. These include a waiting period, which may vary from one month to six months, depending on your insurer. The waiting period commences from the date you receive your final salary.  You must be permanently employed for at least a year with the same employer before you claim.

Which companies offer retrenchment insurance?

Kresantha Pillay, lead specialist: lifestyle protector at Liberty Group, says the company launched a retrenchment insurance product, the Liberty Protector in 2011. “We are one of the few insurance players open to new business. We believe that the benefit adds to the comprehensiveness of the Lifestyle Protector offering, and is one that fulfils a customer need especially in the poor economic environment that South Africa currently faces. The Retrenchment Protector has done fairly well and performed within our expectations,” she says.

Pillay notes that the Liberty Retrenchment Protector is one of the few benefits in the market that is not linked to a life cover policy. “The pay-out is not linked to your salary but rather on the amount of cover taken out. You can select to have inflation-linked premiums where your premium and cover amount increases each year or you can choose a level premium,” she explains.

In terms of the premium payable, Pillay provided the following example, adding that premiums will vary between individuals, depending on their individual profile. A male non-smoker aged 30,  employed as an actuary with an after-tax income of R30 000 who has taken out R1 million life cover and opted to have the maximum retrenchment cover for 75% of his after-tax income would pay a monthly premium of R234.

  • Old Mutual Green light policies offer retrenchment insurance as part of their “lifestyle adjustment cover”, where you can protect your income from R3 000 to R30 000, up to the age of 65.
  • Frank.net offers retrenchment cover for up to six months.

Other forms of retrenchment assistance

  • Absa offers a “credit protection plan”, which will pay 10% of your average outstanding credit card balance or loan for four months if you are retrenched.
  • ooba – this mortgage originator includes a retrenchment benefit as part of its credit life policy offering for your home loan.
  • Liberty Investments – a premium waiver for six months.
  • First for Women – a premium waiver benefit for up to six months.

With retrenchment figures set to increase, coupled with the uncertainty of post-lockdown in the work environment, it is important to retrench-proof your income if you are currently working, and have never given this consideration before.

*This article was first published on Moneyweb and has been updated here.

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