Retrenchment Benefits and Packages in South Africa
Retrenchment benefits may seem few and far between
However, make sure you know your legal rights in terms of what retrenchment benefits are due to you and be sure to structure your final severance package optimally in terms of income tax and also ongoing personal issues such as life cover and medical aid.
Financial worries can be minimised if you know your rights and get good retrenchment financial planning advice to grow your retirement capital, rather than give a large portion of it away to the taxman.
What payment/s can you expect as retrenchment benefits?
- 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.
- Outstanding leave must be paid out in full.
- Notice pay may vary depending on your employment contract.
- 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.
1. 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.
2. 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
3. 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 in respect of retrenchment benefits?
Find out about your medical aid membership and group life cover. Can you take it over in your personal capacity until you find new employment? As you get older, effective, cost-effective medical and life insurance cover can be difficult to get again, so it is worth sticking with existing policies if at all possible.
In summary – retrenchment benefits
Severance, notice and leave pay are specified in terms of South African labour law, along with the basis of their calculation. Bonuses and pension benefits payments are subject to your employment contract.
To avoid paying unnecessary tax on your retrenchment benefits, structure your package according to the guidelines above. In addition, have your accrued pension savings them transferred directly into a retirement annuity or preservation fund.
Negotiate to maintain any medical aid or life insurance contracts if possible to lock in favourable premiums.
A Certified Financial Planner professional can offer valuable advice on about maximising your retrenchment benefits. Visit your financial planner and for advice about all the possibilities BEFORE your retrenchment package is finalized.
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