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 R315,000 of you retrenchment lump-sum free of taxation based on the retirement tax table. [Please note: R500,000 as of 1 March 2014]
The portion of your lump-sum that exceeds this exemption amount will be taxed based on the same tables.
How to Reduce Tax on Retrenchment Benefit
- Lump it all together
Ensure your company puts all your payments due as part of your lump-sum.
- 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 cost’ (for the company car). So think carefully.
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.
Copyright Netto Invest – www.netto.co.za
- We regret to advise that the comments section for this article has closed.
- You’ve Earned It/YEI is not the author of this article, and therefore is not in a position to advise on finance or retrenchment matters.
- If you are in need of retrenchment advice, we advise you to contact your HR Department for advice regarding early retirement and/or retrenchment matters.
- We further recommend that you contact a labour lawyer should you feel the need for independent advice on labour matters.