Retrenchment survival guide

If you have been retrenched or your company has started a process of retrenchment, understand your options and have a financial strategy in place.

Retrenchment survival guide Retrenchments have become a reality for many employees as South Africa continues to face an economic slowdown resulting in large corporate retrenchments. Liberty’s 2018 claim statistics show that 17.8% of all insurance claims for “Young Achievers” (those aged between 21 and 34 and earning between R12 000 and R34 000 a month) were for retrenchment. This has increased from 12% in 2016 and is the cause of the largest number of claims in this segment.

Listen to Maya and Mapalo Makhu discussing this topic in the My Money, My Lifestyle Podcast.

Facing retrenchment is a very frightening experience, but you can manage the stress and financial fallout if you have a plan in place and understand your options.

No such thing as voluntary retrenchment

According to Jenny Gordon, Head of Alexander Forbes Retail Legal, there is no “voluntary” aspect to retrenchment and this phrase should not be used as it is unhelpful when considering the tax treatment of severance packages and retirement fund benefits.

Gordon explains that at the first stage of a retrenchment process, an employer may offer employees a sweetened retrenchment package if they agree to be one of the selected employees to go first. “This is part of the retrenchment process and does not mean that the employee has resigned, which would be a voluntary act of terminating service. It still qualifies as retrenchment,” says Gordon.

It is equally important for employers to make sure they follow the correct process. “Employers must understand the importance of ticking the correct boxes when completing tax and claim forms as the incorrect box can have a significant effect on the way the benefits are taxed.”

While being retrenched is a financial blow, legally it allows you to access many benefits. This includes better tax rates, waivers on premiums and even covers debt repayments.

Your tax benefits

If you are retrenched you can take up to R500 000 tax free from a combination of your retrenchment package and pension. This assumes, however, that you have not withdrawn from a retirement fund previously. While the retrenchment package itself is there to assist you with your day-to-day expenses, try not to use the retirement benefits portion for daily living as this could have a material impact on your future retirement benefit. Think of your retirement fund only as an emergency in case you are unable to find work after your UIF and severance package payment has run out.

Insurance that covers your debt

If you have debts such as a short-term loan, credit card or even car finance, there is a good chance you have credit insurance. In many cases the credit insurance will provide cover for retrenchment. Depending on your insurance it would cover between 6 and 12 months of your credit installments. There are usually time limits before you can claim. For example, in some cases you will not have cover if you are retrenched within 90 days of taking the cover or if you received a retirement notice up to three months before taking out the cover. You can also only claim against your credit insurance if you are up to date on your payments.

According to Tlalane Ntuli of credit insurance provider Yalu, you can only be covered for retrenchment if you are permanently employed. This is something that must be indicated when the policy is taken up. If you are not permanently employed, you cannot be covered for retrenchment and therefore should not pay for the benefit as part of your premium.

In order for the retrenchment claim to be processed, you would have to provide the following documents:

  • Section 189 Letter or Letter of Retrenchment on a company letterhead with valid company stamp.
  • Certified copy of ID
  • Certificate of service
  • Stamped UI 19
  • Settlement agreement/ Loan agreement
  • Employment contract (where required)

Insurance waivers – cover when you can’t pay

Many consumers are unaware of the fact that their life cover, short-term insurance and retirement annuities may offer retrenchment cover. These are usually in the form of premium waivers where your premiums are waived for 6 to 12 months without the policy lapsing.

Retrenchment insurance – providing an income

Some life insurers also provide specific cover for retrenchment as part of their income protection benefits. This is not automatic, so you would have to choose to take this as an additional benefit on your policy. Typically, retrenchment insurance would pay up to 75% of your taxable salary for a maximum of six months The idea is that retrenchment insurance payments over a six-month period will allow you to meet your financial commitments and find another job or start a business. If you do not already have this cover in place and your company is about to start a retrenchment process, you will not qualify as a waiting period does apply.

Steps to take if you are retrenched

Draw up a survival budget: This is how much you need to survive – accept immediately that you will have to cut back on luxuries and “nice to haves”. It may take longer to find a new job than you expected, and you need to make your benefits last as long as possible. Don’t carry on as if nothing has happened. If you adjust your lifestyle sooner rather than later, the retrenchment will have less of an impact on your longer-term finances. Start making adjustments to your monthly budget. For example, you may be able to move back home and save on rent.

Sign up for UIF online: Once you know your unemployment benefits, you will have a better idea of how much of your survival budget will be covered. Even if you chose to take the severance package, as long as your company has issued a section 189 letter, you can apply for unemployment benefits. You can receive unemployment benefits for up to 12 months. UIF applications can be done online at https://www.ufiling.co.za/uif/unemployment-benefits

Claim credit insurance before you lapse: Don’t fall behind on your debt repayments before you have claimed for credit insurance. Magauta Mphahlele, CEO of Ithuseng Credit Solutions, says the main mistake she sees when people are retrenched is that they fall into arrears before claiming on their credit insurance.

“They don’t understand that the policy lapses when the account falls into arrears. It is important to notify your creditors as soon as the retrenchment notice is served so they can advise you of all the options available including insurance claims and possible debt restructuring.”

Speak to your creditors and don’t just let your debt repayments lapse as that will negatively affect your credit score and could result in long-term legal problems. Make sure you are not wasting your severance package on paying debts that may be covered by the credit insurance you have been paying for. If there are outstanding debts that are not covered by credit insurance, it may be financially prudent to settle those with a portion of your severance package, but keep in mind that this may affect the amount of money you have left to live on day to day. You will not be able to access further credit if you are unemployed.

Speak to your car and home insurer. Your policy may include cover that waives your insurance premiums for a period of time after being retrenched, which means you still have insurance in place even when you cannot afford the premiums. However, you need to notify the insurer rather than just leaving the debit order to bounce. If the debit order bounces, your cover will lapse.

Check your life and retirement policies: Ask your financial adviser or product provider whether you have an added benefit on your retirement annuity and life insurance policy that waives your premium contributions for a period of time. In some cases, your premiums could be waived for up to a year, which means that you still have life cover in place even if you cannot meet the monthly repayments. A

gain, you need to inform your insurer of the retrenchment and don’t just let the policy lapse. Also, if you have an income protection policy, find out if it covers retrenchment. Some income protection policies will pay 75% of your taxable salary for a maximum of six months after retrenchment.

Don’t rush into a new venture: Don’t panic by immediately using your retrenchment package to start a small business. Setting up a business takes a great deal of research and planning and most small businesses fail in their first year.

If working for yourself is a dream you have always had, use the opportunity but make sure you have a proper business plan and business case. You can also find ways of earning an income, even a small one, without paying out capital.

Don’t get caught up in the belief that a job is ‘below’ you.  Think of every extra rand as boost to your future wealth. Being active is a lot better for our psyche than sitting at home.

What to do with your home loan

If you are retrenched and have a home loan, contact your home loan provider immediately. In most cases you may have some form of credit insurance in place. Felix Kagura, Head of Long-Term Insurance Propositions at Standard Bank says that the bank provides cover in the event of retrenchment which covers the instalments on the underlying loan for a period of 12 months or until the client gets a new job, whichever occurs earlier.

Geoffrey Lee, Managing Executive of Home Loans at Absa says the bank always recommends taking out a life policy that will cover the outstanding amount on the bond in the event that a homeowner dies, is permanently disabled or gets retrenched.

However, if you are unable to meet your home loan payments, Lee says the bank has processes and tools available to assist through this time. “It is vital that customers immediately engage with the home loans collections department throughout any stage of financial difficulty. The sooner a customer advises us of their financial situation, the sooner we will be able to look at the different plans or options we have in place that could assist the customer, for a period of time.”

Lee says the team will explain the various options based on the nature of the customer’s financial circumstances. These are split between short-term and long-term plans.

With short-term plans, home loan instalments can be reduced for a period of six months and potentially extended up to 12 months depending on the customer’s situation. Arrangements can be made to reduce the instalment to as low as 25% of the Contractual Monthly Payments in extreme cases, based on the customer’s affordability.

With the long-term plan, the loan could possibly be restructured. This includes extending the term up to 360 months to reduce the monthly instalments. “The acceptability of a forbearance plan is primarily dependent on the customer meeting the affordability criteria and the fulfilment of the arrangements successfully and as always, each situation is assessed individually,” says Lee.

Mfundo Mabaso of FNB Home Finance says the bank provides various options to distressed customers. This includes a payment holiday of up to four months while the customer waits for their package, interest-only payment for up to four months or reduced repayment of up to 50% of their normal mortgage repayment. The bank also provides Quick Sell which allows the customer to trade out of their current property and find a home that is more affordable.

Any restructuring of a loan will result in higher interest payments over time, but it can provide breathing space rather than losing your home. If you are unable to secure an income, you may eventually need to make the decision to rather sell your home than continually accruing more debt.

How much should you be paid?

Arlene Leggat, president of the South African Payroll Association, says the procedure for retrenchment is clearly set out in the Labour Relations Act. The Basic Conditions of Employment Act also provides clear guidance on what has to be included when calculating the severance package.

The act provides that an employer must pay an employee at least one week for every year of completed continuous service. “It is extremely important to make sure that if the company is acquired by another firm that your contract of employment states that your years of service prior to the takeover will be taken into account.” There is generally an agreement that the new company will not retrench people for at least one or two years – but once that time comes there will be retrenchments, warns Leggat. People then find they only have one or two years of completed continuous service.

In order to calculate the value of that one week (it could be more, but it may not be less than one week) the employer must include the employee’s salary or wage, average overtime, shift and standby allowances, as well as travel allowances and commissions.

It must also include the employer’s contribution to benefit schemes such as death, funeral, retirement and medical aid contributions.

This article first appeared in City Press.

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