The chilling reality of retrenchments is gripping various sectors of the economy. There are already casualties in the mining, media, car manufacturing and financial services industries.
And trade union Solidarity estimates that close to 310 000 workers could be retrenched by the middle of 2009 as the global economic downturn starts to bite hard in SA.
So how do you best weather the storm with your retrenchment payout? A retrenchment package, used wisely, can be a blessing in disguise in tough times, says Vicky Dyason, director at Financial Fitness. Whatever the level of earnings, and therefore retrenchment payout, the principles are the same: do not touch the pension payout, pay off debts, and try to stretch the remaining amount by cutting costs and using unemployment benefits. (See examples on the right.)
Dyason says that withdrawing your pension, even to pay off your bond, is a bad idea. That's because you're using a high-penalty payout - because of the tax rate applicable to your pension withdrawal - to settle a lower-interest debt: your bond at, say, prime minus 2%. So withdrawing a R500 000 pension and paying 30% tax leaves you with R350 000. If you pay that into a R500 000 bond, it will leave you R150 000 short and without a pension.
Your other option, assuming you are lucky enough to find employment, would be to transfer your pension or provident fund to your new employers, provided they match. A pension can be used to set up a retirement annuity, which cannot be touched until retirement age. A provident fund, on the other hand, can be transferred to a preservation fund, but it cannot be augmented - though it offers one opportunity for withdrawal.
Dyason says the only case where a provident fund payout should be withdrawn is if it is a relatively small amount, from a short period of employment - for example less than R50 000 - as there is no preservation fund for this.
The retrenchment payout should then be used to settle debts, starting with the smallest ones, such as payments on a car. Items such as school fees should then be paid for the year. After this, the monthly budget should be trimmed of all luxuries.
If there is a spouse who is employed, his or her income should be used to cover the household budget. If there is a shortfall, it should be covered with what is left of the payout.
At this point, one can use unemployment benefits from the Unemployment Insurance Fund. A person who has contributed for four years can receive between 37% and 58% of his or her gross monthly salary for up to nine months. This should help stretch your retrenchment payout a bit longer.
Another option, admittedly accessible to only a few, is to start a business. But such a move comes with a range of warnings. For example, one should not enter the industry from which you have been retrenched, especially if the retrenchments are as a result of a significant drop in business activity.
Grant Hatch, vice-president and head of business strategy practice at Gemini Consulting, says if you're looking to set up a business with money left over from the retrenchment package, you should first do research into the sector you're looking at. "Many people jump too quickly into the wrong kind of business."
Hatch says the first area to look at is the kind of skills you possess. For example, a recently retrenched human resources executive can either go into consulting on their own or partner a small consulting firm. The next decision to make is the structure - whether you go into the business with one or more partners or take the franchise route.
Hatch notes that in the current environment, potential entrepreneurs should avoid businesses that are sensitive to consumer spending - from a Spur franchise to a bed and breakfast operation. So, any franchise you decide on should offer business-to-business service. These include courier services or distribution - the kind of functions that companies outsource as part of cutting costs, says Hatch.
On funding, Hatch notes that banks are unlikely to lend too much money in the current environment, and one may need to rely on angel investors to set up the business. The biggest danger is to underestimate your working capital needs, which he says is a leading cause of business failure.
The final thing to bear in mind is that a business that is set up during hard times will do well when the economy turns.
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