Your 5-point plan on being retrenched

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Being ‘let go’ will become a reality for thousands in the coming year. Here’s what to do if it happens to you.

Irvin Tsimane, a Liberty financial adviser, notes that since retrenchment is a life-changing event, it is a good time to speak to your financial adviser to determine what your immediate income needs are as well as what debt, if any, should be prioritised and what money should be preserved. Financial planner of the year 2019, Hardi Swart agrees, saying that when you are about to be retrenched, it is not only the loss in income you have to deal with but also the identity crisis associated with retrenchment and the feelings of uncertainty and the worries of not being able to provide for your family.

Here’s what you should do:

  1. Take stock

Swart says a budget becomes critical if you know you are about to be retrenched. This means you must identify all your current expenses so you can determine which costs you can eliminate and which expenses you can decrease.

  1. Have the awkward conversation

“This is not the time to be coy. Rather have an open conversation with your family and those that are financially dependent on you. They need to understand that there is likely to be pressure on cash flow. This means they will have to start limiting their spending and giving up certain luxuries,” Swart says.

  1. Sign up to claim from the Unemployment Insurance Fund (UIF)

If UIF was deducted from your salary while you were working (this will appear as a deduction on your payslip), then you are entitled to claim UIF when you are retrenched. It is important to note that you must lodge your UIF claim within six months of the date you stop working.

You will need to register for UIF by completing a registration form and you have to produce a copy of your bar-coded South African ID, copies of your last six payslips, a service certificate from your employer, a UI-19 form filled in and signed by your employer. Once you have all this and proof of your registration as someone seeking work, you must go to the nearest Labour Centre in your area and ask to sign the unemployment register. The Department of Labour takes about eight weeks to pay. You will have to sign the unemployment register every four weeks to prove that you still need to claim the UIF benefits.

Your salary and UIF contributions over the last four years will determine how much you receive in benefits from the UIF. For example, if you earned R15 000 a month and you were employed for four years (48 months), you would be entitled to R35 297.87 in UIF benefits and this would be paid out over eight months, with payments of R4 412.33 a month. You can check your individual benefit calculation here.

  1. Contact your creditors.

This is critical. Ideally, the sooner you contact your creditors to let them know about the change in your circumstances, the better. Your retrenchment is going to impact your ability to pay back your debt. “Be honest with your creditors and, where possible, try to re-negotiate your current payment plan,” Swart advises.

  1. Check your numbers

This is not just about checking what the company owes you. You should also check if you have any retrenchment cover attached to your life policy or income protection policy. Some insurers, such as Liberty, offer stand-alone retrenchment insurance, which pays out a maximum of R30 000 a month for up to six months. This payout, however, is not linked to your income but is based on the cover amount you selected when taking out the policy.

Swart adds that you should find out precisely what your severance package looks like. Typically, a retrenched employee is paid one week’s pay for each completed year of service. “However, many employment contracts come with retrenchment policies in place, which will provide the employee with a higher level of severance pay than the national minimum. You also need to determine all other payments that are owed to you; unclaimed leave, notice pay, commission, overtime, and other payments unique to your position,” he advises.

How are retrenchment pay-outs taxed?

Tsimane says the tax law applicable to retrenchment packages is similar to that paid upon retirement. “This means you get the first R500 000 of your payout free of tax (assuming no previous withdrawals) and the balance will be taxed as follows.”:

2021 tax year (1 March 2020 – 28 February 2021)

Taxable income from retrenchment pay outRate of tax
R0-R500 0000% taxable income
R500 001 -R700 00018% of taxable income above R500 000
R700 001 -R1 050 000R36 000 +27% of taxable income above R700 000
R1 050 001 and aboveR130 500 +36% of taxable income above R1 050 000

Source: SARS

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

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One Response

  1. I hope that very few people need this information Neesa, but for those who do it’s great. One problem which I have seen recently is that many employers who have deducted UIF from salaries have not paid them to the fund. Tragic for some people who are retrenched.

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