What to do if the retrenchment blues sock you
LEIGH ROBERTS Advises employees being retrenched - in the first of a three-part series
BEING retrenched is a scary time (unless you really hated your job or boss), and the pressure is heightened when you're called upon to make some serious financial decisions.
The decisions you make now could have a major effect on your future financial well-being. So rule number one is: don't panic. Let common sense prevail.
Before making any financial decision, be sure you have all relevant information. Then consider your needs - for instance, short-and long-term cash flow; wealth-creation goals, and retirement plans.
Once you've made your decision, sleep on it for a few days. If it still feels right, go ahead. If it doesn't, go back to the drawing board.
It's a good idea to consult an independent qualified financial adviser (one recommended by a friend).
There are two rules to remember: first, your adviser can't make a decision for you - it's your responsibility. Second, be cynical: is the advice motivated by the commission to be earned on the product being sold?
The many decisions a newly retrenched employee is called on to make revolve around two issues: the retrenchment package from your employer, and the money in your pension or provident fund.
If you are 55 or older, there is another consideration: do you opt for early retirement rather than retrenchment? (The latter two issues will be covered in parts two and three of this series.)
What retrenchment payout can I expect?
This rests largely on the generosity of your employer. Labour law requires a minimum severance pay of one week per year of service.
A typical retrenchment package comprises a notice salary (one to three months); leave pay (for leave due but not taken); and a severance gratuity.
You may be offered fringe benefits, such as the company car. But remember you pay tax on the market value of the asset.
What about my company medical aid fund?
Losing the security of comprehensive medical aid cover is one of the shocks of retrenchment.
Generally, your medical aid cover ceases on your last day of work. Some employers, however, allow you to stay on the fund for a few months after retrenchment.
If you have this option you will pay the full monthly cost - but it's worth taking.
You should enquire from the fund itself whether you can continue as a member, as some commercial funds permit individual members.
Will I pay tax on my retrenchment payout?
Sadly yes, but the taxman offers two concessions:
Your average rate is calculated as the tax payable as a percentage of your total annual taxable income. For example, if you earn R65 000 a year, your average rate is 22%, whereas your marginal tax rate is 43%.
Your employer will apply to the local Revenue office for a directive on how much tax to deduct from your payout. This rate is usually your average tax rate of the previous tax year.
Note that this deduction is a preliminary payment. The final calculation is made when you submit your annual tax return, as only then can your actual average rate for the year be determined.
According to the SA Revenue Service, many people find themselves paying in on their year-end tax assessment as too little tax was deducted at the preliminary stage.
If you are not a registered taxpayer - for example you're a SITE-tax only employee who does not submit an annual return - you are obliged to a register as a taxpayer as soon as you receive your retrenchment payout (this rule applies to all lump sums). A double blow for the retrenched employee!
Tax planning points:
What should I do with my payout?
This depends on whether you have found another job. If you're fortunate enough to have one lined up then use your retrenchment windfall to clear any debt, before looking to invest it.
If you're still on the job market, it's crucial you don't tie up your money, as you will need it to fund your living expenses and monthly debt repayments.
Johannesburg financial adviser Derek Sumption of Brantam says the best place to store your payout is an access-type mortgage bond or car finance contract.
First, the money is readily available, and second, it's working to lower the total interest payable on the debt in the process.
Now's the time to think thrice before spending your cash supply. Draw up a lean and mean monthly budget (see our website for an outline - www.btimes.co.za).
You may be able to claim unemployment insurance (see accompanying story).
What to do about medical aid cover?
If you can't continue as a member of your ex-employer's fund, you must consider taking out cover for yourself.
As a minimum, advises Howard Walker, joint managing director of Alexander Forbes Health Care, you should have hospital cover to fund private hospital fees in the event of an accident or serious illness.
You can buy this cover from a medical aid fund or as a policy from a short-term insurance company.
Walker estimates that a young healthy person will pay about R300 a month. A middle-aged man with a wife and two children will pay about R500 to R750 a month.
But read the fine print as some policies exclude more than they include!
Of course, the ideal is to have the full cover of a medical aid fund. But this is pricey. A young healthy person will pay about R600 a month; the above family anything from R1 000 to R1 500 a month (this is lower if the fund charges according to income rather than age).
There are many commercial medical schemes that accept individual members - phone around for quotes or speak to a trusted financial adviser.
Remember, though, your membership is not guaranteed. If you or a family member have a history of serious illness, the fund could decline you membership or exclude those conditions.
How much medical cover you decide to buy, says Walker, is a balance between the risk of not being covered and its affordability.
What about my share options?
Your alternatives depend on the current market price of the company's shares, and on the nature of the company's share incentive scheme.
This is where you have the right to acquire shares in the future, for example, 20 000 shares at R5 each.
If the current share price is lower than your buying price (say R2 in the above example), there's little point in taking up your option.
In this case, simply decline to exercise your option. However, as the share price might bounce back (say to R10) you should hedge your bets by asking your employer to extend the period of your option.
Remember that if you do exercise your option and then sell the shares, you will pay tax on the profit.
This is where you have already taken up your allocated number of shares at a set price, but are indebted to the company's trust fund for the unpaid purchase price.
There is a solution if you find yourself in the unfortunate situation of being retrenched and owing your employer more than the current value of your shares.
Tony Davey, group lawyer of Fedsure Holdings, says the company can relieve the employee of his/her obligation to purchase the shares or alternatively buy back the shares from the employee at the original share price.
"It's common practice for a company to include a stop loss provision in the rules of a share purchase scheme to cater for these situations," he says.
If there isn't such a provision in place, the company is not obliged to buy back the shares.
Need some financial advice on your retrenchment? Financial adviser Derek Sumption of Brantam will be happy to answer your queries in these pages. Send us a letter to: BT Money/Retrenchment, PO Box 1742, Saxonwold, 2132.