Retrenchment: Proactive steps you can take

YOCO, a local fintech company that facilitates credit card transactions for small businesses, analysed their data to understand just how bad the lockdown has been for their clients. The industries affected most include retail; food and hospitality; and healthcare, beauty and fitness.

Sales have plummeted more than 80% in these sectors, which will have a ripple effect on creditors, landlords and of course, employees. 

Instead of living in fear of retrenchment, rather take proactive steps so that you can be more resilient if and when it happens. 

Cut down and start saving

While you still have a job and a salary coming in, take a long, hard look at your spending habits and cut out all non-essential spending. The lockdown has made this process relatively easy by limiting what retailers can sell to us, but it’s also worth examining your bank statement to see which debit orders might be unnecessary. For example, does your family really need access to all online streaming platforms, or will one be enough?

Once you have done this exercise, put aside any excess disposable income and start a short-term savings fund, and since you might need this money in the near future, consider investing in a low-risk, easily accessible investment vehicle such as a money market account. This way you will still earn interest and your savings won’t be adversely affected by market volatility.

Severance and retrenchment benefits

If you do get retrenched, your employer might pay you a severance or retrenchment benefit, both of which involve a lump sum payout.

Because these benefits attract a special tax rate, there are conditions: the payout must be the result of the termination or loss of your employment due to your employer having stopped (or intending to stop) trading, or due to your employer embarking on a general cut in personnel.

You will also qualify for the tax incentive if you are 55 years or older at the time of your retrenchment, or if your retrenchment or loss of employment is a result of you having become permanently incapable of employment due to sickness, accident or injury, among others.

Small business owners, take note. You can’t retrench yourself and still enjoy the tax break. More specifically, if you own more than 5% of issued shares or member’s interest in the company paying you the benefit, you will not qualify for the tax incentive.

So, what is the tax incentive?

The South African Revenue Service (Sars) treats a severance or retrenchment benefit as a retirement lump sum payment, and it is therefore subject to the retirement lump sum tax table. The main thing to note here is that the first R500,000 is not subject to tax. A sliding scale applies thereafter, from 18% - 36% depending on the amount received. 

But don’t get excited just yet. The untaxed R500,000 is a lifetime limit, and Sars keeps a record of all your previous taxable withdrawals to make sure you don’t go above the limit. In other words, you can get retrenched more than once and your payouts will be subject to 0% tax each time, but only if the total adds up to R500,000 or less. 

Withdraw only what you need 

Like death or divorce, retrenchment can come as a huge shock and it can create tremendous anxiety. Withdrawing your entire severance or retrenchment benefit might seem like your only option to allow you to keep paying the bills. But if you sit down with a qualified financial planner, create a monthly budget and look at your other options, you might find that withdrawing the full amount is not necessary. 

For example, if you can claim from the Unemployment Insurance Fund (UIF), or if you have another income stream to cover some of your monthly expenses, you can transfer a portion of your retrenchment benefit to a preservation fund or a retirement annuity fund. By doing this you’ll save on tax and play the long game, allowing your savings to benefit from the power of compound interest. This will ensure you get a higher income in retirement.

Similarly, you could put a portion of your severance benefit into a money market account, or use the money to start a tax-free savings account, both of which will stand you in good stead for the future.  

* Mokonoto CFP®, founder and CEO of YellowBlock