South Africans facing retrenchment should be extremely cautious in how they approach their finances and should obtain professional advice, as their decisions can impact their ability to survive the financial strain of unemployment or forced early retirement.
This is the call from Sanlam, following indications in a labour survey this week that South African retrenchment levels have hit a 10 year high, with more than 35 000 people being retrenched in January alone.
Karin Muller, Head of Sanlam Growth Market Solutions, says regardless of the state of the economy, retrenchment usually catches people by surprise and can lead to panic and financial decisions taken in haste.
“The first thing to do when you’re faced with retrenchment is to get professional help in terms of how to manage your finances. You’re likely to find yourself in a state of shock and it’s not the ideal time to try and take critical decisions on your own.”
Sanlam’s annual retirement benchmark study shows that retirement saving is one of the three biggest investment expenses for 25% of retirement fund members, and Muller says most people who have worked for a company will be faced with a decision about what do with their retirement fund money.
“People, essentially, have three choices: They can ask for it to be paid out in cash, or they can request for the money to be transferred to a retirement annuity or they can place their retirement savings in a preservation fund.”
Muller says the first option carries the most risk. “If you’re faced with retrenchment, chances are that your mind is reeling with all sorts of adjustments that have to be made. Understandably, you will need access to cash in the short term, but you should also understand the long term impact of using your retirement savings to fund short-term financial requirements. Remember that you will still have to retire and you will have to provide for that day, somehow or another.
Another option is to request your employer to transfer your retirement fund savings into a retirement annuity – an excellent savings option that can allow you to continue saving later on. An RA comes with several benefits, including tax benefits, and provides you with peace of mind that you won’t be able to access your savings until you’re 55 years old.
A preservation fund, an investment vehicle created specifically to preserve retirement savings, can also be a safe option to consider, she says. With a preservation fund you can access money once prior to your retirement.
Muller says Sanlam’s research shows many people who leave an employer – either for a new job or due to retrenchment – still take their pension fund money in cash and spend it instead of reinvesting it for their future.
Given South Africans’ dismal savings record, this is risky behaviour that impacts people’s ability to survive and to enjoy financial security in retirement.
She says people who receive a retrenchment package have an added incentive to ensure that they seek advice from a qualified financial planner.
“Your personal circumstances, future prospects and ability to take risks will dictate your plans. If you’re a healthy single person with little debt, no dependents and in a career where prospects for new employment are positive your financial planning will look a lot different than a person in his late forties or fifties with family and a bond. Add critical medical expenses to the mix and you’ll realise the imperative to ensure that you obtain the best advice to manage your retrenchment as responsibly as you possibly can.”