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Retirement Planning: Retrenchment

I have been retrenched from my company what options do I have?

It's not a simple decision because you have many varied options and the choice you make will have long-term consequences.

Your options

Cash withdrawal

This option is totally dependent on the rules of your fund. If you have the cash withdrawal option the first R22 500 will be tax-free and the balance will be taxed.

Provident Fund, Pension Fund and Retirement Annuity

The taxable lump sum withdrawal benefit which accrued from 1 March 2009 and retirement lump sum benefits which accrued from 1 October 2007 are aggregated.  This aggregated amount is taxed according to the table below:

R0 - R22 500

0% of the taxable income

R22 501 - R600 000

18% of the taxable income exceeding R22 500

R600 001 - R900 000

R103 950 plus 27% of the taxable income exceeding R600 000

R900 001 and above

R184 950 plus 36% of taxable income exceeding R900 000

The tax is reduced by the tax calculated in accordance with the above table on such lump sum benefit accrued prior to the lump sum in respect of which the tax is being determined.

Remember if you make a cash withdrawal from your pension/provident fund you will have to invest a larger amount at a later stage to make up for the shortfall. Most people never can make up the shortfall, and find they become reliant on their family in their retirement. Some never will be able to retire and will have to work for the rest of their lives.

Invest in your new employees fund

You can invest your pension / provident in your new employees fund. The problem is you will have no control over your assets and the money cannot be accessed until you retire or leave the company.

Preservation Fund

This is a private retirement fund, which belongs to you. The preservation fund is a place where you can leave your money until you reach retirement age. This would generally be your best option.
• There is no tax payable on the transfer to a preservation fund.
• The years that you have worked for your employer will be taken into account when you calculate your tax-free lump sum at retirement.
• You have total discretion where the money is invested and you can make changes at any time.
• If you are in a provident fund you will retain the option of full cash payout at retirement.
• If you are retrenched from your new company and do not find employment you can access part of or the full amount from the preservation fund.
Only one cash withdrawal can be made and this is restricted to the rules of your previous pension or provident fund.

Important check list

1. The first R30 000 of your retrenchment package will be tax-free and the balance will be taxed at your average rate. This tax-free portion will only be paid if you have not been paid a tax-free amount before. Obviously if the retrenchment package is less than R30 000 you will only be paid that amount. The normal retrenchment package is one weeks pay for every completed year of service.

2. Your company would first need to get a tax directive from the Receiver of Revenue to pay you the retrenchment gratuity. Assuming your tax affairs are up to date, this could take up to six weeks.

3. The transfer from the pension / provident fund can take up to three months; this is totally dependent on the rules and the cash flow of the fund.

4. Check if you have conversion options on the group life assurance (GLA) as you only have 30 days to exercise this option. This will then become a normal life policy where you pay the premium. The only medical test would be an HIV test.

5. You should get both the employer and your share of the pension / provident fund.

6. Find out when the pension / provident funds final investment returns are distributed. Your calculation could be based on an interim interest rate.

7. Remember to cede your deferred compensation to your new fund.

8. A withdrawal form must be filled in and signed by your human resources manager.

9. Don't take R1800 tax free from your pension / provident fund as this will be your one and only cash withdrawal from a preservation fund.

10. Don't take any money from your pension / provident fund to pay back any payment to the old pension fund (housing loans etc.), as this would be your one and only withdrawal. Rather have the option to make a withdrawal from your preservation fund at a later stage.

11. Always consult with a professional advisor.



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