How to protect your finances when faced with retrenchment

Question: I am 50 years old and work for a large company. We have been told that the company will be going through a retrenchment process, and my role may be affected. I am not yet sure whether I will lose my job, but I am worried. I still have bond repayments and family responsibilities. What should I do now from a financial point of view, and what should I look out for in the retrenchment package if I am selected for one?

Answer: At 50, you are in a sensitive phase of your financial life. You are not at the start of your career, but you are also probably too young to treat this as retirement. The danger is that a retrenchment package can look like a large amount of money, but if it is used to fund day-to-day living for too long, it can quietly destroy your retirement plan.

Before you sign or spend anything, work out your survival budget. This is not your normal lifestyle budget. It is the minimum amount you need each month to keep the household running.

Separate your expenses into three categories:

• Essential;
• Important but adjustable; and
• Nice-to-have.

Your bond or rent, food, medical aid, insurance, school or family obligations and transport are essential. Streaming services, holidays, eating out and upgrades can wait.

You need to know one number: how much cash you need each month to survive. Once you know this, you can work out how many months your emergency fund and retrenchment package can buy you.

From a financial perspective, you are entitled to the following: severance pay, notice pay, leave pay and bonus or incentive entitlement. Find out what the company policy is with regard to these items.

Pension or provident fund options

Your retirement fund may be your largest asset. If you withdraw it now, the damage can be permanent.

You will usually have several options. You may be able to leave the money in the employer fund, transfer it to a preservation fund, transfer it to a retirement annuity, or take some or all of it in cash.

Taking the money in cash should be a last resort. It may trigger tax, and, more importantly, it removes capital that still needs to work for the next 50 years. At 50, you may still have 15 years before normal retirement and possibly another 35 years in retirement.

A preservation fund is often useful because it keeps the money invested for retirement while preserving certain access options. The right choice depends on your existing fund, tax position, debt levels and whether you expect to work again soon.

Tax

Your severance benefit may qualify for the favourable retirement lump sum tax treatment, where the first R550,000 would be tax-free. However, there are other implications, so I would suggest that you talk to a financial planner.

Medical aid and risk cover

When you leave employment, your group life cover, disability cover and income protection may fall away. Ask your employer or benefit administrator whether you have a conversion option that allows you to continue some cover in your personal capacity without fresh medical underwriting. These options often have deadlines, so do not leave them until later.

Do not cancel medical aid without understanding the risks and possible penalties if you rejoin later.

Insurance for unemployment

If you have contributed to the Unemployment Insurance Fund (UIF) and your employment is terminated, you can apply for UIF benefits. Government guidance says you should apply as soon as you become unemployed or within six months of termination, and you must register as a workseeker. The UIF will not replace your full salary, but it can help to stretch your cash runway.

Avoid big decisions in the first month

Do not immediately settle the bond, buy a car, fund a child’s lifestyle, make a speculative investment or start a business with the full package. These may be valid options later, but first you need a plan.

A sensible approach may be to hold enough money in a low-risk investment to cover six to 12 months of essential expenses, preserve your retirement money where possible, settle only high-interest debt, and keep your insurance and medical aid intact. Before signing the final package, get advice from both a labour specialist and a financial planner.

The labour specialist can help you understand whether the process and offer are fair. The financial planner can help you decide how to structure the money so that one difficult event does not derail the rest of your financial life. 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@sfpadvice.co.za

This story first appeared in our weekly DM168 newspaper, available countrywide for R35.