The reality of retrenchment

Nearly 60 000 people have been retrenched over the past year, with the mining sector hardest hit, according to research by trade union Solidarity.

These numbers are based only on media reports and retrenchment notices since April 2015, and the actual number could be substantially higher, the union said.

Solidarity general secretary Gideon du Plessis warned that the current pattern and wave of retrenchments are “very similar to the situation at the end of 2008 and the beginning of 2009, which was the precursor to the recession”.

With more job cuts likely, how can you protect yourself against the financial implications of retrenchment?

The key is to start making a plan now, while you are still employed. Sonia du Plessis, a certified financial planner at Brenthurst Wealth Management, says the aim should be to have three to six months’ salary saved in the money market as a nest egg.

Even if there are no talks about retrenchment at your workplace, it’s a good idea to save about 10% of your monthly salary towards this nest egg, she says. Once saving towards that goal is accomplished, the money can be channelled towards other things like reducing debt.

John Manyike, Old Mutual’s head of financial education, says you should chat to a financial adviser to find the most suitable savings vehicle for your emergency fund.

Options include a fixed deposit at a bank or a unit trust, and the right vehicle would depend on the individual’s risk appetite and affordability measures.

Retrenchment insurance

Financial service providers also offer retrenchment insurance, which could be an option.

The ideal is to self-fund a period of unemployment following retrenchment by using your emergency savings, but this is not a realistic option for everyone.

“If one is already living from hand to mouth, then we can assume that this is probably not an option as savings and investment would be limited.  So the answer then is to insure,” says Hesta van der Westhuizen, advisory partner at Citadel.

However, retrenchment insurance can be expensive, and there is usually a six-month waiting period before payments will be made. Typically, the retrenched person is paid for six months, unless they are employed again within three months.

It is therefore important to read the fine print in the benefits before signing and to avoid duplicating insurance benefits, says Van der Westhuizen.

Your home loan agreement can, for example, already include automatic retrenchment cover, so make sure you know what you are paying for. Some big corporates also include retrenchment cover in their employee benefits.

“Retrenchment cover is offered as additions or rider benefits in both long-term insurance policies and short-term policies. So one can add the benefit to, for example, your life policy,” adds Van der Westhuizen. Be cautious, however, of over-insuring yourself, says Manyike.

Wouter Fourie, certified financial planner and chief executive at Ascor Independent Wealth Managers, says even though it’s difficult to plan specifically for retrenchment, it’s always good to plan for the unforeseen.

“Special insurance products that pay out when you lose your job are usually very expensive and many of them have a waiting period, which means that it will not help you to take out a policy when you hear that you will be retrenched,” says Fourie.

In terms of voluntary retrenchment, Manyike says most insurers would be cautious of insuring such a person, but he advises consumers to speak to a financial adviser to get the full details on whether the insurance underwriter would actually pay out in the case of voluntary retrenchment.

This article originally appeared in the 12 May 2016 edition of finweek. Buy and download the magazine here

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