Coping financially with being retrenched

Wilfred Moyo, Investment & Economic Strategist at Metropolitan.

The big five money decisions you’ll be faced with in the unfortunate event that you are retrenched.

Being retrenched can be quite a challenging experience, both emotionally and financially. The emotional roller coaster that follows retrenchment may lead to stress or depression if not managed properly. Often, fears about the financial future can fuel these negative emotions.

Although retrenchment can be stressful to navigate, taking the time to make the right money choices during this time will stand you in good stead in terms of your financial wellness. In general, there are five immediate financial decisions you may be faced with if you’re retrenched: source of future income, medical aid options, retrenchment package payout, retirement fund payout and tax implications.

Wilfred Moyo, Investment & Economic Strategist at Metropolitan, expands on these decisions as he shares some tips to manage your finances in the unfortunate event that you’re retrenched.

1. Seek new opportunities to earn an income

Most people start panicking at this stage because they’re uncertain about the source of their future income. While the job hunt is underway, use your skills to earn an income, for example carpentry or baking. If your venture really starts taking off, you could also use this opportunity to become an entrepreneur and start your own business. Now is the time to start networking with people and put your feelers out there for new opportunities.

2. Invest your retrenchment package wisely

Retrenchment packages vary from company to company. By law, the minimum package you can expect is calculated as two weeks of your income for every year that you have worked for the company. When you receive your retrenchment package, carefully plan what you will do with the money with the help of a qualified financial adviser. A good investment strategy should have a healthy balance between your future and current financial needs and should aim to stretch your funds so that they last longer. Beware of ‘get rich quick’ schemes! Always seek professional financial advice if something seems too good to be true.
You can invest some of your money into your newly-established venture or top up your retirement savings in a tax-efficient way.

3. Secure your retirement savings

If you belonged to the company pension or provident fund, you would have accumulated some retirement savings, which you can:

a. Invest in a preservation fund – transfer your retirement savings tax-free and allow it to grow in a safe vehicle until you retire.
b. Buy a retirement annuity – transfer your retirement savings tax-free. You cannot access the funds until you reach the age of 55.
c. Cash in – withdraw your retirement savings in cash, but you will pay a hefty tax bill.

Shop around for the best solution to preserve your retirement money by being mindful of the fees payable and the underlying investment options.

4. Be aware of the tax implications

Avoid paying unnecessary tax on your retrenchment benefits. When cashing in on benefits, always consider the tax effect on your money. Make use of a certified financial adviser to help you structure your package in a tax-efficient manner.

5. Weigh up all your medical aid options

Funding your healthcare expenses is an important consideration. You may have been part of a restricted medical aid scheme but now you may be faced with investigating open medical aid scheme options. Among the things to consider when choosing a medical aid scheme is the cost in terms of your affordability, benefits and the solvency level of the medical aid scheme, which should be 25% or higher. A poorly-managed medical scheme with low solvency should be avoided.

Get back on track

Keep in mind that managing your finances is only one part of the retrenchment process. If you are between jobs, take stock of your holistic wellness, too. Focus on all areas of your life that need attention - whether it is spiritual, social, emotional, occupational, environmental, mental or physical wellness, and try to find a healthy balance.