Retrenchment is one of the most traumatic transitions a person can go through in their career, says Lee Bromfield, CEO of FNB Life.
“The shock of being retrenched coupled with the financial stress may leave you uncertain about how to proceed. Sadly, consumers who do not have retrenchment cover are exposed to greater financial risk when they’re cut back,” says Bromfield.
What is retrenchment cover?
Generally, retrenchment insurance pays up to 70% of your taxable salary - depending on your tax bracket - for up to six months.
“The idea is that retrenchment insurance payments over six months will allow you to meet your financial commitments until you find a new source of income such as finding another job or starting a business,” Bromfield says.
People who have been retrenched may find themselves in a tough financial situation due to rising costs, strained economies as well as increases in interest rates and inflation.
Here are some of the financial buffers should you be retrenched:
1. Have credit or income protection insurance
People who have retrenchment insurance or credit protection insurance may be exempt from paying some of their debts for six months, while other debts may be written off.
“Most options have a six-month waiting period and pay up to R30 000 per month for six months if you are retrenched. However, it is critical to research your options and weigh the various benefits,” he says.
2. Get financial advice
Speak to a financial adviser who can guide you through the tough decisions you need to make after you have been retrenched. A financial adviser can help you make decisions regarding your severance package, retirement fund benefits, group life cover and medical aid.
Ensure that the financial adviser is qualified and is completely independent.
3. Take care of your retrenchment package
Don’t be tempted to spend all your retrenchment money impulsively. Instead, create a budget based on any emergency funds to ensure that your fund last longer.
“Your financial adviser will advise you on the best vehicle to house these funds while you make plans for future employment or business opportunities,” Bromfield says.
4. Protect your risk
“Check if your group life cover provides you with a continuation option. A continuation option allows you to retain the life cover without undergoing medical underwriting.” says Bromfield.
“Do not cancel your medical aid. If your employer has been paying your medical aid premiums on your behalf, give your medical aid debit order instructions to ensure that there is no lapse in coverage.”
5. Emergency fund
An emergency fund will be critical in ensuring that you have a financial buffer if you have been retrenched.
If you are unsure of how much you need to have in your emergency fund, Katlego Gaborone, a financial planner at Momentum says you need to have at least three months’ salary saved up in an emergency fund.
An emergency fund will come in handy if the unexpected happens and you need money, plus it will you prevent you from getting into debt.
Janine Horn, financial adviser from Momentum agrees having an emergency fund or savings for a rainy day “to avoid the pitfalls of life is essential. You need to take a look at your budget and assess where you can free up some money to keep away in an emergency fund".
As a final piece of advice, Bromfield says customers with policies taken out before the implementation of the NCA (National Credit Act) Credit Life Regulation, which are restricted to retrenchment cover, are able to claim where they have not been retrenched but are unable to earn an income for various reasons.
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