This Women’s Month, we are forced to acknowledge the blow that Covid-19 and the associated lockdown has had on the financial standing of women. According to Marguerite Marais, CFP and Technical Legal Adviser: PSG Wealth, when it comes to retrenchment, in particular, women have been hit hard.
She says that according to a recent NIDS-CRAM report on the gendered effects of the COVID-19 crisis, data suggest that by March 2021 men’s employment and working hours had recovered to pre-Covid-19 levels, women’s employment and working hours remained below the baseline figures in February 2020.
“While retrenchment has become a reality for many over the past few months, women – who are often already on a backfoot financially to their male counterparts – are being disproportionately affected by the crisis.”
Marais offers advice for women who find themselves facing the prospect of retrenchment: “Once the initial shock is over – it is very important to reassess your situation and take proactive steps to get things back on track. This is something one should not do alone as emotions can cloud your judgement. The valuable input from an objective third party can assist in giving you valuable guidance and helping you regain control of your situation.
Understanding your retrenchment package
“When you are retrenched, the first step will be to understand what your retrenchment package is made up of and the different amounts you will be receiving or have access to”, says Marais. These amounts are usually made up of:
- normal income
- severance benefits
- retirement fund benefits
‘Normal income’ entails the employee’s last salary, notice pay, leave pay, etc., which is generally taxed at the marginal income tax rate of between 18% and 45%.
“Your severance benefit is a lump sum paid to you by your employer. The Basic Conditions of Employment Act gives guidance as to what one should receive, which is a minimum of one week’s remuneration for every completed year of service. Your severance benefit can only be taken as a lump sum and will be taxed according to the retirement lump sum tables, together with all previous retirement fund lump sum benefits received,” explains Marais.
Last but not least, says Marais, your retirement fund benefit is the actual fund value of your pension and/or provident fund. At retrenchment, you have different options on what you can do with your retirement fund benefits, which include:
- Accessing the funds by taking the full benefit as a cash lump sum
- Transferring the full benefit to a qualifying retirement fund
- Taking a portion of the benefit as a lump sum and transferring the balance to a qualifying retirement fund (if the rules of the fund permit this).
“Note that any amount taken as a cash lump sum will be taxed according to the retirement lump-sum tables,” warns Marais, “together with any severance benefits or retirement lump sums taken before, whereas any amount transferred to an approved retirement fund will be transferred tax-free.”
When faced with retrenchment, you will need to carefully assess the different options and how they can affect your retirement savings. It is important to consider not just your immediate circumstances but also your long-term plans.
“While it is understandable that when your income is suddenly cut-off, you might be tempted to dip into your retirements savings, it is strongly advised that you remain focused on preservation, as far as possible,” says Marais.
Preserving your retirement savings
It is best not to dip into your retirement savings for unforeseen events, but rather make use of your emergency fund. By not taking a lump sum in cash, you avoid paying additional taxes, preserve your savings for your actual retirement and stick to your savings goals.
Comparing two actions, the difference in savings at retirement can be depicted as follows:
|Taking a lump sum for unforeseen event, paying additional taxes and then preserving for retirement||Taking no cash lump sum, using emergency funds for unforeseen event and preserving all your retirement funds|
|Investment value at retrenchment (age 50)||R2 650 000||R2 650 000|
|Cash withdrawal for unforeseen event||R1 000 000||none|
|Taxes (taxed at retirement lump sum tax table – assuming no previous withdrawals)||R117 000||Tax free|
|Cash available for unforeseen event after tax||R883 000||n/a|
|Fund value to invest for retirement||R1 650 000||R2 650 000|
|Fund value at retirement (age 65) (investment growth of 9% p.a., with no additional contributions)||R6 010 096||R9 652 578|
Practical tips to rebound from retrenchment
Marais says that if you find yourself dealing with a retrenchment, the best approach is to proactively take control of the situation, by reassessing your position:
- Review your monthly budget – make a list of your expenses and assess what you can cut back on. Use your retrenchment package wisely. Instead of making the mistake of spending it all, consider saving a portion for another rainy day.
· Maintain your emergency fund and stick to your long-term savings goals. You will need to readjust your financial and savings goals in the short term, until you again find employment, but maintain your emergency fund and long-term goals.
· Marais also adds that retrenchment inadvertently provides a good opportunity to re-evaluate your skillset and ability to find a new job. “Consider your strengths, skills and experiences, and the industry you hope to work in, then plan your next steps to start earning an income in order to continue saving.”
· While starting a new business venture might sound exciting, Marais advises that you only do so if you have done proper research and discussed this with a business mentor/coach. “Make sure you have a trusted sounding board. Speak to your financial adviser for guidance and valuable input on the different options available to you at retrenchment.”
It is important to see retrenchment as a springboard to the next phase of your life, which you are able to direct and take charge of. “You are far more likely to achieve the outcomes you want if you have a plan, and pro-actively steer your finances in the right direction,” Marais concludes.
By Marguerite Marais CFP®, Technical Legal Adviser, PSG Wealth