Those who have been retrenched in the wake of the economic havoc wrought by Covid-19 will likely have received a package from their company, but might not be sure what to do with the money.
“It’s not as simple as taking that money and paying off whatever debt you have,” says Rob Rainier, Regional Head at Alexander Forbes. ‘Rather, it is important to have a strategy of what debt you should pay off, and it makes sense to first pay that with the largest amount of interest, this could be from a money lender, a personal loan or an overdraft.”
At this time, it is common for family members and friends to come calling because they realise you have cash – be disciplined in who you’re lending money to and see it as a gift in case you do not get it back, Rainer cautions.
PRESERVE YOUR RETIREMENT FUND
According to 2019 Alexander Forbes Member Watch Survey of Retirement Fund Investment Managers, the number of members who did not preserve their retirement savings after resigning, being dismissed or retrenched from their employer increased from 88.5% in 2012 to 91.2% in 2019.
In order to protect yourself in retirement, Rainier says people should try and preserve their retirement funds for as long as possible, and instead live off the package they received from their company. “What is your likelihood of being employed again within a certain period, be it three months to a year? Only if you get to the end of this period and your retrenchment package has run out, as a last resort should you consider cashing out a portion of your retirement fund.”
Those who cash out retirement savings before reaching retirement age often don’t realise that besides reducing the amount of money they have to fund their retirement; they are utilising their tax benefits meant to aid them at this time. “If you find yourself in a difficult financial situation, you need to find a balance between using the money now, and how many years you have available to retirement to replace these funds.”
The Receiver of Revenue applies the retirement tax table on retrenchment, i.e. your retrenchment package (usually a few weeks’ pay for every year or service) and retirement fund balance attract tax. The first R500 000 is not taxed, assuming of course that you have not made previous withdrawals. Remember that the retirement tax table is based on a sliding scale with 36% being the marginal rate for any amounts withdrawn above R1 050 001. As mentioned, it is important to bear in mind that this is a lifetime scale. PAYE tax is applicable to all other monies due to you; leave pay, pro-rata bonus, long service award (if applicable) etc.
If you have only been at your employer for a short period of time, your package would be smaller than someone who has been employed a longer period.
DETERMINE YOUR COST OF LIVING
Before you decide what debt to pay off using your package, understand your living expenses. “Take the last three months of your bank statements and see what you’re spending your money on. Record it in a spreadsheet to understand what your normal living expenses are, and what your needs and wants are. Do you need a subscription service or daily cappuccino, or do you want it?”
Put your package into an interest-bearing account which is set up to pay you a salary as if you were employed, the amount should be that which covers your living expenses each month. “This is not an opportunity to upgrade your cellphone or buy a new car, cash. Remain disciplined, cut where you can and be as frugal as possible during the job hunting process.” Rainier says many people consider putting their retrenchment packages into their bond, but ran the risk of removing more money than they had put in, and spending it impulsively. “It is essential that you create the correct spending discipline.”
If you only get a small package, think how you can use some of this money to improve your skillset and ability to be employed. “Spend it on education that helps advance you in the jobs marketplace,” Rainier says.
Finally, do your best to replace your Group life cover and disability cover as well as your medical aid as soon as possible, as you still have responsibilities towards your family. Speaking to a financial adviser will help you ensure that you’ve covered all bases.