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Retrenchment – How to make the best of it

Worry. Sadness. Anger. Confusion. Being retrenched causes a range of emotions for you and your family. And on top of it all, there’s a lot of admin to attend to. Knowing what to expect can help you gain some control over the situation.

Once your employer has announced the retrenchment process, you will be offered a retrenchment package.

Your retrenchment package should include:

This is a simplified calculation based on the Basic Conditions of Employment Act.

Severance package =

1 Week’s pay for each full year of completed service


Retirement fund withdrawal (optional) 


NOTICE PAY: Day rate x Days left over to the end of the month (in which the retrenchment takes place)


LEAVE PAY: Day rate x Outstanding leave days

Nomnikelo explains….

Unathi worked at her company for 20 years for a salary of R17 320 per month. She was retrenched on 12 April and had only taken four of her 15 leave days for the calendar year. To calculate one week’s pay, divide the salary by 4.33, which is R4 000. For the day rate the salary is divided by 21.67, which is approximately R799.26, but let’s round it off to R800.

1 week’s pay x 20 years
R4 000 x 20 = R80 000

Retirement fund withdrawal
Unathi withdraws R20 000 before transferring the rest of her retirement savings to a retirement annuity.

Because the R100 000 (R80 000+R20 000) is less than R550 000 she doesn’t pay any tax. Her employer must apply for a tax directive, though. See SARS’s lump-sum Table 1 towards the end of the article.

Days left over x day rate
13,67 x R800 = R10 936

Outstanding leave days x day rate
11 x R800 = R8 800

= R19 736

Unathi must pay 18% tax on R19 736 as it falls in the R1 – R237 100 tax bracket on the SARS tax table for individuals (2024 tax year). The balance is R16 183,52.

Her ex-employer pays a final severance package of R116 183,52 (R100 000 + R16 183,52) into Unathi’s bank account.

Ata wants to know…

What should I do with my retirement fund savings?

If possible, do not touch your retirement savings at all. Retirement savings are for retirement, i.e. when you can no longer physically work. Rather use the money from your severance package to get by until you find a new job.

Retirement fund savings
If you are retrenched, you’ll have to decide what to do with your retirement fund. In an ideal world, you want to avoid paying taxes. Here are five options.

1. Keep your retirement savings in your current employer-sponsored fund. That means your savings stay put. You become a “paid-up” member and can no longer make further contributions to the fund, and no longer enjoy the group life benefits like life insurance. The fund must, within two months of becoming aware that you have left your employer, issue you with a paid-up membership certificate so you can prove your membership of the fund once you retire.

Ata wants to know…

What is an employer-sponsored fund?
That’s when all company employees must belong to a company-specific retirement fund set up by the company as the employer – it is also called an occupational fund. Usually, the employer will also contribute a percentage to the retirement fund as part of the employee’s salary package. The cost of administering the fund and other costs such as risk premiums are usually deducted from the employer contribution.

2. Transfer your retirement fund to your new employer’s fund
If you have a new job lined up, this is a great tax-free option. You then continue contributing to the new fund once you receive your first salary.

3. Transfer the savings to a retirement annuity (RA)
This is tax-free, and you can keep on contributing to the RA once you have a new job. An RA will only pay out at a selected retirement age, which cannot be before age 55. RAs differ in terms of their minimum contribution requirements. Speak to a financial advisor and choose a versatile RA that allows you to make changes to it. If your new employer has an employer-sponsored retirement fund, you can leave the money in the RA and start contributing to the new retirement fund.

4. Transfer your savings to a preservation fund
Once the savings are transferred to a preservation fund, you can make one partial or full withdrawal before retirement. Although you must strive to keep your savings until you need them, a preservation fund offers a back door if you are uncertain about the future. Remember that the withdrawal will be taxed. Also, bear in mind that you cannot contribute to a preservation fund. If you want to make ongoing contributions, rather consider a RA.

5. Withdraw all your retirement savings
This should be your last resort as you will be taxed on the amount as per the below table.

Ata wants to know…

What about withdrawing a portion from your retirement fund?
Although it is not recommended, you can withdraw an amount from your retirement fund before you transfer it to a new fund, RA or preservation fund. This amount is then added to your severance package and is subject to the retirement lump-sum tax table.

Table 1. Retirement fund lump-sum benefits or severance benefits

R0 – R550 000

0% of taxable income

R550 001 – R770 000

18% of taxable income above R550 000

R770 001 – R1 155 000

R39 600 + 27% of taxable income above R770 000

> R1 155 000

R143 550 + 36% of taxable income above R1 155 000

Leave and notice pay are not part of a severance benefit and are subject to normal income tax.

The silver lining…
If you manage to find a job soon after retrenchment, you will be better off than before you were retrenched. You can pay off debt or your home loan with the severance package and start earning again and contributing towards your retirement.