Retrenchment is taxing - how to create a survival plan to avoid financial disaster

Question: I’m 54 years old and have just been retrenched from the company I joined straight out of university. I had planned to work for another 11 years, so this has really messed up my plans. I am concerned about my financial future. Can you help?

Answer: Being retrenched in your fifties is particularly tough. I have helped many people in your situation in the past. Companies often hesitate to hire people in this age category, as they see them as being too expensive or too close to retirement. 

You may need to reinvent yourself and understand where you can really add value. I have found that although it is very stressful and may take longer to get back on your feet, many people look back and say it was the best thing that happened to them.

So, before you make any financial decisions, it’s important to pause and consider where you will be generating an income going forward.

Step 1: Reflect on your career path

• Why were you retrenched?
  Was it because of a company-wide restructuring resulting from financial underperformance, or has your role become less relevant in the current market?
• Is your skill set still in demand?
  Many industries are rapidly evolving. For example, I’ve worked with marketing professionals who have had to pivot from traditional media to digital skills. Today, many IT professionals are being affected by AI and need to reskill. If your skill set isn’t aligned with market demands, consider investing in short courses to remain competitive. Remember, you have many years of experience and valuable networks that you can bring to the table. It often takes a small change to set you off on your new career path.

Step 2: Create a survival plan

Once you have a sense of how you might earn income again, it’s time to stretch your resources as far as possible.

• Draw up an austerity budget:
  List all your monthly expenses and identify where you can cut costs. This isn’t a permanent budget – it’s designed to reduce your spending while you’re between jobs. Focus only on the essentials that are crucial for the family’s survival;
• List all income sources:
  Include items like UIF, credit insurance for retrenchment and investment interest. Inclu­de the interest on your retrenchment package. Now, subtract your income from your monthly expenses and divide your retrenchment package by this number. This will give you the number of months your retrenchment package will last. You now know how much time you have to get a new income stream going; and
• Explore side gigs:
  While you are looking for a new job, even small freelance jobs or side gigs can help to extend your runway. Every bit of income gives you more breathing room.

Step 3: Handle your retirement funds carefully

Avoid cashing in your retirement fund unless absolutely necessary. Early withdrawals (before age 55) are taxed heavily and can damage your long-term financial security.

Preservation funds are your friend

Transfer your retirement benefit to a preservation fund, which allows you to:

• Avoid immediate tax;
• Make one emergency withdrawal if absolutely necessary; and
• Keep your money growing tax-efficiently.

Step 4: Protect your risk cover

When you leave your job, you will probably lose your group life, disability and critical illness cover.

If your group policy allows it, consider using the continuation option. This lets you convert your group cover into an individual policy, without medical underwriting. This is especially important in your fifties, when age and health may start to count against you.

Speak to a financial adviser about your cover needs. If you have dependants or debt, maintaining some form of life and disability cover is essential.

Insider tip: Use the two-pot system to your advantage

Your retrenchment package is taxed as income if you’re under 55 and don’t qualify for the R550,000 tax-free severance exemption. If your cash flow allows, you could make a retirement annuity contribution in your retrenchment year to benefit from a high-income tax deduction.

Then, in the following tax year – when your income may be lower – you can make a two-pot withdrawal, which would be taxed at your new, lower marginal rate. This creates a tax arbitrage opportunity: high deduction now and low tax on withdrawal later.

This strategy needs to be carefully managed with professional advice, but it can provide a valuable tax break during a difficult time in your financial life.

Final thoughts

Retrenchments are extremely stressful – I know, I have been through two of them. However, with the right planning, this can become a turning point, not a financial disaster. DM

Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to kenny.meiring@sfpwealth.co.za

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.