There are two types of benefits that an employee can receive if they are retrenched, a severance benefit or the retirement fund.
If you are employed, make enquiries to find out what’s due to you in the event of being retrenched. It’s imperative to accurately ascertain if the payment is defined as a Severance Benefit or not because of the impact it has from a tax point of view.
The following conditions qualify a pay-out as a Severance Benefit:
If it is paid out when you are age 55 or older irrespective of the reason for termination of the employer-employee contract or if you are unable to work due to an accident, injury, mental or physical illness. Also, the employer may cease to continue trade or you as the employee may be deemed redundant.
There could also be a general reduction of work personnel (downsizing), which could also be defined as a severance package. It’s very important to note that if you as the employee owned more than five percent of equity in the business it cannot qualify as the severance benefit. If the lump sum paid out qualifies as a retirement benefit then the first R500 000 is not taxed but the amount thereafter is, as per tax table defined by the South African Revenue Services.
If it is not defined as a Severance Benefit, remember it is taxed at your marginal rate thereby increasing your annual gross income if you withdraw it. Pre-retirement planning could include investing in linked investments or voluntary annuity income plans.
The latter could ensure guarantee of income and a guarantee at maturity. Understand that while guaranteed incomes provide you with certainty and peace of mind they are more expensive. If you have decided to embark on retirement, you and your financial planner should have a detailed discussion that revolves around the monthly living income requirements and budget, any debt to settle, the number of years you wish to plan for an income and how long will the income sustain you for.
Retrenchment is a life altering event therefore a comprehensive understanding is fundamental to safeguard you in making an informed decision.
