Retrenchment – what you should look out for
Many of us are worried about ourselves or friends and family being retrenched
Here are some tips on how you can get the best after tax payout when you are retrenched
1. Be careful of resigning and taking a voluntary retrenchment package
If you are retrenched, you are entitled to a severance package. This is typically 1 week’s remuneration for every completed year of service.
However, if you take a voluntary retrenchment, this is classed as a resignation and the
payout is taxed at your normal marginal rate. The generous tax benefits given to normal retrenchments do not apply here.
For example, consider two employees (Jack and Joe) who both joined a company 20 years ago, both are 45 years old and both earn R40 000 a month. Jack elects to take a voluntary retrenchment while Joe is formally retrenched by the company.
The company pays out a severance benefit equal to 1 week of salary for every year worked so both Jack and Joe get 20 years x R10 000 = R200 000
When it comes to tax, the treatment is different. If you are formally retrenched like Joe, the first R500 000 of your benefit does not attract tax. This can have quite an impact on the benefit you get.
Employers may offer a slightly better package to encourage you to take a voluntary package. In this case, it is important that you do the numbers first and take the tax into account before making a commitment. It is worth chatting to a certified financial planner who can help you make the right choice.
2. Invest your retirement benefits wisely
When you are retrenched, you are entitled to any money that you have in a company pension or provident fund. Again, the decisions you make have important consequences so this is not something to do without getting professional advice.
Options open to you include:
Taking all or part of your retirement benefits in cash. There are tax consequences here and you will be setting yourself up for poverty in later years. This is generally not recommended