Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

The big challenge with retrenchment is that you do not know how long it will take for you to get a new job.  You need to make sure that whatever retrenchment package you get lasts till you get a new job.  This requires careful cashflow management.

Draw up a budget

Work out how much you spend each month by drawing up a monthly budget that lists all your monthly expenses.  You must then go through this budget and identify what is essential and what can be cut out or reduced. Remember, you do not know when you will get another job so you need to manage your money tightly. (if you do not know how to do this, drop me an email and I will send you a template)

Sources of income

You must then identify any sources of income:

• You will receive a severance package, and this will provide the bulk of your income for you till you get another job. If you divide your severance package by your monthly budget, you will know how many months you will have before your money runs out.

• If you have contributed to the UIF fund, you will be entitled to monthly UIF payments. This will, however, only be for a limited period. 

• Another lump sum you will receive are the contributions you and your employer made to your retirement fund. My recommendation is to put the entire amount into a preservation fund and not be tempted to make a withdrawal for a small debt or a holiday. You are only allowed to make one withdrawal from your preservation fund so this could be a huge help if it takes you longer than expected to find employment. Talk to your financial adviser before making any decisions regarding this.

Risk cover

This is an often-overlooked aspect of retrenchment. We are rightly focused on ensuring we have enough money to live on while we look for another job. However, should we pass away or become disabled, our families financial wellness can be put at risk.

If you worked for a large company that had a retirement fund, there is a very good chance that the fund had life and disability benefits. In many instances, these benefits have what are called Continuous Assurance Options which allow you to take out an individual life policy with the same benefits.  The big advantage here is that you will be granted this cover without having to have any medicals.  These options are usually only available for a month after you have been retrenched so you should act quickly.

As you get older, you often develop medical conditions which could prevent you from getting risk cover.  If you are overweight or have any medical issues or, I would strongly recommend that you chat to your financial advisor about taking up these continuation options.

Medical aid

It is important that you remain a member of your medical aid. If you have a break in cover, you may find yourself having exclusions and a waiting period applied. If affordability is an issue, you can consider reducing you level of cover rather than cancelling your cover completely.