Charlene Smith
A retrenchment package will often be the largest lump sum a person ever receives and the temptation is to spend all the money, hoping tomorrow will take care of itself.
Each year employees contribute R27-billion to retirement funds – and those who lose their jobs rarely make sensible re-investment decisions.
Hermie Rossouw, regional manager at Old Mutual Employee Benefits in Port Elizabeth, says there is a disturbing trend for wage workers to take voluntary retrenchment and not invest the money. Better educated, higher earners are more likely to invest the money, but even they can succumb to the spend principle.
He advises retrenched employees to get financial advice for ideas on the feasibility of available options.
Old Mutual offers Protektor, a preservation fund that allows one withdrawal from the fund prior to retirement at age 55. Rossouw says that putting money into such a fund, or a retirement annuity or a pension fund at a new job, can also ensure money is not lost to tax. “If the person [isn’t] re-employed, he or she can at least fall back on it and make one withdrawal or surrender the policy,” he says.
The average return on Protektor has been about 19,4% over the past decade. The declaration for last year was 18,5%, 20% the previous year and 15% in 1995. Rossouw says it follows market trends, but is protected from negative returns.
Francois Marais, senior marketing actuary at Sanlam Life, notes that someone who is retrenched will have a pension or provident fund lump sum and a salary compensation package of six to 12 months’ salary.
“A pension fund should always be saved for retirement; if taken to a single-premium retirement policy or preservation fund, there is no tax.”
He says that the younger a person is, the more likely it is they will spend the money, “but if they are over 40, to spend that money on anything other than saving for retirement is foolish”.
Someone retrenched at 55 or 60 can always retire, but he cautions against retiring too early unless one has built up a substantial retirement nest egg.
Marais says the salary package should be kept liquid and used as bridging finance while seeking a new job or setting up a business.
The money could also be put in a high-interest account or unit trust, “but unit trusts should not be short-term investments. Rather keep the money liquid and if the person gets a job, they could put the surplus money into a new-generation policy with index-linked guarantees with, say, a five-year term, or unit trusts if you don’t mind the risk.”
Marais also says medical insurance should be considered. He suggests a hospital plan with cover against big expenses, instead of a medical aid where all expenses are covered.