Retrenchment Benefits and Packages in South Africa

Retrenchment benefits may seem few and far between but make sure you know your rights in terms of what is due to you and structure your package optimally.

Financial worries can be minimised if you know your rights and get good planning advice to grow your retirement capital.

What can you expect as payment on retrenchment?

1. Severance pay should be at least one week's remuneration per completed year of service. Remuneration is calculated including basic salary and payments in kind.

2. Outstanding leave must be paid out in full.

3. Notice pay may vary depending on your employment contract.

4. In the absence of a contract, you are entitled to notice pay as follows:

• If you have been employed for 1 - 4 weeks: 1 weeks' notice pay
  
• If you have been employed for 4 weeks - 1 year: 2 weeks' notice pay
  
• If you have been employed for more than a year: 4 weeks' notice pay

Depending on your employment contract again, you may be entitled to a pro-rata payment of your annual bonus, and the balance of any pension or provident fund benefits.

Tax Issues for Retrenchment Benefits

In South Africa the taxman gives you the first R30,000 of your retrenchment lump-sum free of taxation.

(This is once-in-a-lifetime tax break so if you have used it in a previous retrenchment, it will not no longer apply.)

The portion of your lump-sum that exceeds the R30,000 exemption will be taxed at your average tax rate.

How to Reduce Tax on Retrenchment Benefits

• Lump it all together
  

• Ensure your company puts all your payments due as part of your lump sum. This includes leave pay, pro-rata bonus, gratuities and retrenchment compensation.

• Top up for retirement
  

• Up to 15% of your lump sum can be put into your pension or provident fund pre-tax. Check with your financial planner whether your funds rules allow for this.

• Assets instead of Cash
  

• If the company gives you an asset in lieu of cash, you pay perks tax on the market value of the asset. This may range from 'negligible' (in the case of a laptop computer) to 'substantial with attendant running costs' (for the company car). So think carefully.

• Reduce your Tax Rate
  

• The average tax rate applied to the balance of your lump sum payout is the highest of your applicable tax rate for the current tax year and the previous one. Keep the current tax year's rate down by deferring income where possible. (For example, do not cash in share options till next year)

Guard Your Retirement Portion of Retrenchment Benefits

You have three possible options with your pension or provident fund payout.

Spend it
This is the worst possible option. Firstly, you will make a large, 'voluntary' contribution to the Taxman's coffers and secondly, in all likelihood you will never build the capital up again.

Invest via a retirement annuity
With this option, you cannot withdraw any of the capital until you reach the age of 55. This has the advantage of locking in your retirement savings and you pay no tax on the transfer

Invest via a preservation fund
This is similar to a retirement annuity, but such a fund allows a single withdrawal of up to 100% of the amount before the age of 55. Again, you pay no tax on the transfer.

What else can I negotiate?

Find out about your medical aid membership and group life cover. Such cover can be difficult to get again, especially as you get older. Visit your financial planner and get expert advice BEFORE your package is finalized.

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