Don't take the money and run

Here is a common scenario: There are rumors that your employer may be planning retrenchments. You assume that you’ll definitely be retrenched since you don’t have a great relationship with your manager. Or you hate the negative impact this would have on your emotional well-being, so you decide to resign immediately.

If you are retrenched or fear that there is a chance your company will be retrenching employees, it is important to stay calm and keep a clear head. This will allow you to get advice, and make the right decisions for your future. Don’t offer to resign ahead of retrenchments as this will negatively affect your tax bill.

Example 1

Boitumelo would only receive R850, 000 lump sum before tax from her retirement fund if she resigns. If she decides to resign before the retrenchment process starts and ‘take all the money and run’, she’ll pay R165, 600 in tax. The amount she’ll keep is R684, 400.

However, if she waits for her employer to issue a Section 189 notice (intention to retrench), she’ll receive R150 ,000 severance pay (only paid on retrenchment) plus R850, 000 lump sum from her retirement fund. She’ll pay R117, 000 in tax and the amount she’ll keep is R883, 000 assuming she takes 100% cash.

By selecting to resign before the retrenchment process begins she’d lose R198, 600 in cash (R883, 000 minus R684, 400). To put this into context, R198, 600 is equal to R16, 550 a month (tax-free) that she can pay herself after losing her job. The tax benefits are more favorable when you are retrenched than when you resign.

We encourage retirement fund members not to be tempted to dip into their retirement savings. Withdrawing funds from your retirement savings before you retire, not only reduces the tax-free amount available to you when you retire, but also reduces your accumulated retirement savings. What are your options?

Depending on your circumstances, the best thing may be to transfer your savings into a preservation fund. There are some big, important financial decisions to be made before you resign or are retrenched from your job, and a qualified financial adviser can help you make them with confidence.

Please contact our Client Service Centre or your wealth manager on 011 047 6500 or email [email protected] with any questions regarding your investment.

Yours sincerely,

Sphelele Mncube

Head of Investments