In the third of a three-part series Duane Naicker, Head of SURF (Sygnia Umbrella Retirement Funds), looks at how best to use severance pay and manage retirement funds if you’re one of the many who’ve suffered a Covid-induced retrenchment.
In the third of a three-part series Duane Naicker, Head of SURF (Sygnia Umbrella Retirement Funds), looks at how best to use severance pay and manage retirement funds if you’re one of the many who’ve suffered a Covid-induced retrenchment.
In my last two articles I covered what you’re owed when retrenched and steps to take safeguard yourself financially. It’s a stressful position to be in, and now you also have to make tough decisions on how best to use your severance pay and manage your retirement savings. I’m hoping I can help…
Firstly, you may not transfer your severance pay into a preservation fund or, if you’ve found another job, to your new employer’s retirement fund. In essence, you get to decide where and how to invest it (you have full discretion).
If you’re not pressed to use some or the full amount of the severance pay, then you’ll be in the fortunate position where the choice is quite literally yours: you can pay off short-term debt (such as credit cards, vehicle finance, or personal loans) or long-term debt (such as housing loans) or invest it in unit trusts, exchange-traded funds, foreign markets. Starting-up or topping-up your emergency fund should also be considered.
My only word of caution is to carefully consider the fees attached to whichever investment vehicle you choose. Always remember that the higher the fees, the less chance your investment has to grow . In 2013, a National Treasury report found that if fees incurred by “a regular saver are reduced from 2.5% of assets to 0.5% of assets each year, he or she would receive a benefit 60% greater at retirement after 40 years in a retirement fund with regular contributions”. In a preservation fund, the same fee reduction over a 30-year period would result in an 80% greater benefit at retirement.
It may also be wise to consider how accessible the investment vehicle is. If, for instance, you’ve secured new employment it may not be as crucial to access funds quickly, whereas if you’re still on the job market you may want an investment vehicle that allows immediate access to funds should you need it.
I’m going to throw a spanner in the works here and pose the question: what if your employer has been so floored by Covid-19 that they are cash-strapped and unable to pay a severance package?
Prof. Bendix stresses that severance pay is a legal obligation as provided for in the Basic Conditions of Employment Act, therefore it’s non-negotiable... well, almost. The only “loophole” for the employer is if they apply to the Minister of Labour for an exemption. If the Minister gives such a redemption, you may struggle to get severance pay – but this scenario is highly unlikely and very unusual.
Big Decisions: Retirement Savings
As a result of changes to the law from 01 March 2019, when your service terminates prior to retirement then the retirement savings you have accumulated in your company’s retirement fund automatically becomes paid-up.
This means that you do not need to complete any paperwork in order for your retirement savings to be preserved in your retirement fund. You still have the option of transferring your retirement savings to a preservation fund, retirement annuity or your new employer’s fund.
Furthermore, you can still encash your retirement savings, but consider this option carefully before you’re tempted to do so. Not only will your retirement timeline be severely affected by having to start saving for retirement from square one, but you will also be subject to the tax table for death and retirement benefits for whatever amount you withdraw – and this will count against your once per lifetime non-taxable retirement allowance of R500,000. Remember too that your severance pay erodes the tax free lump. If your severance pay was over R500,000, then your retirement savings will most likely be taxed (irrespective of the amount).
As an example, if you have R500,000 in severance pay and retirement savings when you are retrenched and withdraw that amount, you will not be able to claim any tax-free amount when you do retire. Put another way, if at retirement you have a total of R500,000 saved, you would have already withdrawn the tax free amount and would then have to pay tax on your remaining R500,000 according to the tax table.
While I realise that times are extremely tough, if you are retrenched and can avoid drawing retirement savings, please do so – your older self will thank you for it!
The better options to protect your hard-earned retirement savings would be to: make the amount paid-up and leave it there until it’s time to retire (if you’re happy with the fees and the investment growth); transfer it to a preservation fund; transfer it to your new employer’s retirement fund; transfer it to a private retirement annuity with lower fees and/or better growth prospects.