Retrenched – What Now?

Retrenched – What Now?

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Being retrenched can bring on many negative but also positive feelings: stress, anxiety, loss of control, anger, happiness, opportunity to name a few.

In this time when you have to make serious decisions about your financial situation, letting your emotions cloud your financial judgement could be detrimental. You need to remember that many aspects of your finances remain under your control.

These decisions will have an impact on you, not only now, but also in years to come. Therefore it is critical to gain a better understanding.

Some practical steps to help you keep your finances on track:

Maintain your cash flow

Unfortunately the bills don’t stop when you are retrenched.  If you have never done a budget before then now is the time to start. This will show you how much money you need to pay your bills and still put food on the table.

By knowing how much you need every month you can calculate how long your retrenchment package will last. For example if your retrenchment package is R50 000 and you need R10 000 per month to sustain your lifestyle, your retrenchment package will provide you with an income for five months.

 

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Have your retrenchment package paid into a separate account such as a money market account. Pay yourself monthly by transferring the amount you need for the month as calculated by your budget into your normal account, thereby establishing a temporary pay office. This will ensure that you do not spend more than what is necessary as you might think ‘but I have the money’.

Remain appropriately insured

Risk Cover: Most companies make provision for you to take over your life cover in your personal capacity. This is called a conversion benefit/option.

Bear in mind that you will no longer have the discounted premium benefit under the group cover, so the premium will most likely increase but the advantage is that you will not need to go for medical underwriting. This would count in your favour if your health has deteriorated and you might not be able to get the cover otherwise.

It is very important to maintain your life cover to ensure your debts are settled and your family is taken care of in the unfortunate event of death.

Medical Aid: As in the case with life cover, most medical aid companies also make provision for a continuation benefit. You become a private client and, depending on your needs and affordability, you can change your medical aid option and no waiting periods will apply.

Making the right decision in relation to your retirement savings

Retirement savings are complex and the wrong decision may unnecessarily cost you a significant amount in tax and lost benefits.

There are several options available on exiting a retirement fund. The combination of the options that are best for you will depend on a range of factors – fees, tax and your personal circumstances.  Decisions relating to your retirement savings cannot be ‘reversed’ therefore it is important to consider all factors at play.

  • Transferring your retirement savings to a preservation fund

A preservation fund is like your own private pension or provident fund. If you need to take some or all of your money before you retire, you can, but you can only do this once.  If you do, you will have to wait until you retire (at any time from age 55) to get the rest of your money the transfer will be tax free and you will only pay tax when you take some or all of your money before retirement. The rules of the fund will remain the same. You cannot make additional contributions to the preservation fund

  • Transferring your retirement savings to a retirement annuity

Your fund value is preserved until retirement. The transfer will be tax free. You can retire any time after you have reached age 55. You can make additional contributions to a retirement annuity fund

  • Transferring your retirement savings to a new employer

Your new employer’s fund rules must allow for the transfer, the transfer will be tax-free.  You will only be able to access your money on retirement or resignation and the new fund’s rules will specify your retirement age however the new fund may have different fees and charges. The new fund may have different investment risks and returns 

  • Cash out your retirement savings

If you decide to take you money in cash (all of it or only part of it), you will have to pay tax.Taking a withdrawal before retirement will decrease the tax-free amount that you will be entitled to at retirement. Cashing out your retirement savings may compromise your ability to maintain the lifestyle you would like in retirement. Take time to make these decisions and remove the emotion from them as they will affect the rest of your life.

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Mirinda Laurens
Mirinda is a Corporate Financial Services Manager at Consolidated Financial Planning.