Scrutinise lump sum payout costs closely

Early retirement or retrenchment are a traumatic choice that ever more employees are having to face.

Early retirement or retrenchment are a traumatic choice that ever more employees are having to face.

Every company will offer a different package for early retirement or retrenchment, so it is impossible to make hard-and-fast rules about which is the best option. But it is important to know which of the offered packages features should be closely examined.

Most important is the pension, and if you are a member of a defined-benefit or a defined-contribution fund.

Under a defined-benefit fund, early retirement is heavily penalised. You will also be retiring on your current salary, which will usually be a lot less than your projected salary at retirement. Calculate the cost of this and try to recoup as much as possible when negotiating with the company. The value of the pension being offered must also be scrutinised.

A defined-contribution fund is very different. The three components of this type of fund are the employee's contribution, the employer's contribution and the growth that has accrued in the fund. New legislation states that members will get all the monies they contributed on leaving a fund for any reason.

Medical aid considerations have an enormous effect on post-retirement costs, considering that most claims on a medical aid are from people in post-retirement years.

With early retirement some companies allow the member to remain on the medical aid, either at the subsidised rate they paid while employed or at the full rate, which can be twice what they have been paying. You need to understand the difference where a company has contracted to continue subsidising your medical aid to where a company retains no real contractual obligation.

Anyone with a car allowance who has bought a vehicle on hire purchase or lease will have to start financing the repayments.

Some companies will allow a retiree with a company car to continue using it for a few months. Others allow the retiree to buy the car at book value and is taxed at the difference between the book value and the market value.

Few people scrutinise these costs and most think they have hit the jackpot when they receive their lump-sum payment. But if they do not get another job in five years, they will have little left over when spending and inflation have eroded their capital base.

Using the rule of 72 and at a 7 percent inflation rate, the purchasing power of the pension will halve in 10 years.

Though the lump sum payout might seem a large sum of money, with inflation it will probably not provide the required income for both spouses for life.

l Bryan Hirsch is chief executive of Pioneer Financial Planning. Visit or e-mail