Retrenched: making the payout, the emergency fund and the retirement fund last
In our example, ten years of service earns at least R69 231 in severance, the first R550 000 of severance is tax-free, and R109 231 of cash buys about 7 months once UIF covers part of the bills.
In 30 seconds
- Ten years of service on R30 000 a month earns at least R69 231 in severance - one week's pay for every completed year.
- The first R550 000 of severance is tax-free under the retirement lump sum table, but notice pay and leave pay are taxed as normal salary.
- R109 231 of cash lasts about 7 months when UIF covers part of R22 000 a month of spending.
The first week: work out what is actually coming
A retrenchment letter usually arrives with one total. It is really three or four different amounts, taxed differently, and it helps to split them before you plan anything:
- Notice pay - the salary for the notice period, whether you work it or not.
- Leave pay - unused annual leave, paid out in money.
- Severance pay - by law at least one week's pay for every completed year of service when the job ends for operational reasons. Your employer may pay more.
- Your retirement fund - not paid by your employer at all. It stays in the fund until you decide what to do with it.
A worked example
Take someone on R30 000 a month gross with ten completed years of service, one month's notice and ten days of unused leave.
- A week's pay is about R6 923 (R30 000 x 12 / 52).
- Minimum severance is R69 231 (10 weeks x R6 923).
- Notice pay is R30 000 and leave pay about R13 844 (R30 000 / 21.67 working days x 10).
The notice and leave pay go through PAYE like any salary. The severance is taxed separately, on the retirement lump sum table.
Tax on the severance
- The first R550 000 is taxed at 0%. In the example the whole R69 231 is tax-free - if you have had no earlier retirement or severance lump sums.
- That R550 000 is a lifetime amount. It is shared with retirement lump sums you take later, so using it now leaves less tax-free room at retirement.
- Above R550 000 the rate steps up: 18% on R550 001 to R770 000, 27% on R770 001 to R1 155 000, and 36% above that.
- Your employer needs a tax directive from SARS before paying severance, so the payment can take a little longer than the last salary.
These are the SARS retirement lump sum brackets as we last confirmed them. Check the current table on the SARS link below before relying on the exact amounts.
The retirement fund: the decision with the longest tail
Under the two-pot system that started on 1 September 2024, a fund balance is split into parts that behave differently when you leave a job:
- The retirement component stays locked until retirement. Retrenchment does not change that.
- The savings component can be withdrawn - at least R2 000, once per tax year - and is added to your income and taxed at your marginal rate.
- The vested component (money saved before September 2024) can usually still be taken in cash on leaving a fund, taxed on a lump sum table. Every rand taken now is a rand not growing for retirement.
- Leaving it invested is always an option. You can move it to a preservation fund or keep it where it is.
The order that usually protects you best: spend the emergency fund and the severance first, then UIF, and touch the retirement fund last. Our two-pot post shows how the savings pot refills.
Your own fund's rules decide exactly what you may take and when. Ask the fund for a written breakdown of each component before you decide.
UIF: part of the bills, not all of them
- Claim straight away. UIF unemployment benefits are generally claimable after retrenchment, and the claim must be made within six months of the job ending.
- The benefit is a share of your income, on a sliding scale, between about 38% and 60%, and is worked out on earnings up to the UIF ceiling of R17 712 a month.
- In the example that is about R6 700 a month (38% of R17 712), well short of the R30 000 salary.
The benefit percentage and the ceiling are as we last confirmed them; the Department of Employment and Labour sets the final amount for each claim.
How long the cash lasts
Say the household spends R22 000 a month and already had R40 000 in an emergency fund. Severance adds R69 231, for R109 231 of cash. Notice pay and leave pay cover the first month or so; after that:
- Monthly gap: R22 000 spending - R6 700 UIF = R15 300.
- Runway: R109 231 / R15 300 = about 7 months.
- Cut spending to R18 000 and the gap falls to R11 300, stretching the same cash to about 9.7 months.
That runway, not the size of the payout, is the number to plan around. Debit orders that can pause, an insurance policy with a retrenchment benefit, and a call to your bank before a payment is missed all buy more months. Our post on how many months an emergency fund should cover explains the starting target.
How MaxWealth helps
The emergency fund planner takes your own monthly spending and the cash you have, so you can see how many months the payout, your savings and UIF together will cover - and how much each spending cut adds.
Sources
- SARS, retirement lump sum benefits and severance benefits tax table - sars.gov.za.
- Basic Conditions of Employment Act 75 of 1997, section 41 (severance: one week per completed year) - gov.za.
- National Treasury, two-pot retirement system (from 1 September 2024) - treasury.gov.za.
- Unemployment Insurance Fund, benefits and earnings ceiling - labour.gov.za.
- Calculations: weekly pay as monthly x 12 / 52; runway as cash divided by spending less UIF (MaxWealth workings).
Education, not financial advice. This post explains how the rules and the arithmetic work. It does not recommend any financial product, and your own situation may differ - speak to a registered financial adviser or tax practitioner before you act. Figures were checked against the linked sources on the date above.