The year ahead may prove to be challenging given the current state of South Africa’s economy. Gross domestic product (GDP) growth figures seem to suggest that the prospect of retrenchment is a strong possibility.
The savings rate in South Africa has shown that the majority survive on salaries and wages. According to the South African Reserve Bank (SARB), ‘the household savings rate, which was around 5.9% of GDP per year in the 1970s, dropped to 1.6% in the 1990s and is now shockingly low at just above 0%.’
It’s important that you have financial securities in place so that you can be prepared if you are retrenched.
Be prepared to weather the storm
When faced with a fear and/or difficult scenario such as the risk of retrenchment, many people do everything they can to try and avoid dealing with the issue; this is unlikely to help you in any way. It may be challenging, but taking positive steps to equip yourself to handle the situation can be possible – it starts with a change in your mindset.
In an article written for Psychology Today, author, Bill Knaus, explains that awareness and purposeful action are two parts of changing your mindset.
The first step is to accept the possibility of retrenchment and pre-empt its impact by starting to save money so that you’re covered should you be retrenched. The general rule of thumb is to aim to save enough money to cover at least three months’ living expenses. It may sound difficult, but by contributing regularly, it can be achieved.
Knaus suggests that the money you save should be invested in a low risk, easy-to-access investment, such as a money market fund that earns returns but is unlikely to be affected by market fluctuations.
Depending on your employment contract, you may also have specific benefits owed to you in the event of retrenchment. It’s best to speak to an independent financial adviser about the options available.
Severance and retrenchment benefits
Should you lose your job, you may be entitled to receive lump sum benefits from your employer and/or retirement fund. The benefits may qualify for special tax treatment; however, certain criteria should be met.
It’s important to note that because retrenchment benefits are connected to the loss of employment, they may only be provided by occupational funds which include pension or provident funds as well as umbrella pension or umbrella provident funds. They are unfortunately not available for retirement annuities.
You may find the tax implications quite complicated. If you need assistance, it may be beneficial to speak to an independent financial adviser. He/she can explain the difference between a severance and retirement benefit as well as whether you could receive special tax treatment.
Think again before cashing in your retirement savings
If you’re in a financial tight spot, cashing in your retirement savings may seem like a solution, but this can be risky and has the potential to set you back further than you think. This is becauseyou’ll have to start saving from scratch and will miss out of the benefits of compound interest.
Should your circumstances allow, it’s a much better idea to consider transferring retirement savings into a preservation fund or a retirement annuity.
A preservation fund is designed to be a preferable fund in which to invest your pension or provident savings due to its tax-saving benefits. However, it’s important to understand that you can’t make contributions to this fund from any other sources of income.It provides you with a once-off opportunity to access your funds in future.
In comparison, a retirement annuity allows you to invest your retirement fund savings, and you’re able to continue making contributions.
If you receive a severance benefit and can afford not to use the money, it’s worth looking at investing it in a tax-free investment (TFI) or a unit trust.Should you be retrenched, you may also be able to claim from the Unemployment Insurance Fund (UIF). The benefits are capped, but every Rand counts in a financial emergency.
Consider all these options carefully should you be retrenched. During this uncertain time, it’s best to take advice from financial experts such as investment managers or independent financial advisers.