Many employers who are retrenching staff for operational reasons differentiate between employees who are over age 55 and under, but there are a number of considerations that should be taken into account to benefit the employee, says Jenny Gordon, head of Retail Legal at Alexander Forbes.
We often see that if the member is over 55, the termination of service is determined by the employer to be early retirement whereas for employees under age 55, it is retrenchment. In some situations, an employee who is being retired might receive additional benefits such as a medical scheme subsidy so it is beneficial to become a retired employee. But if this is not the case, being retrenched keeps more options available to the employee than retirement.
There have been many changes to the rights of retirement fund members on retirement from employment in the last few years. Until 2015, a person who reached “normal retirement age” in terms of their employment contract (the last date) was obliged to immediately retire from the employer fund, with benefits accruing on date of retirement. From 1 March 2015, the definition of “retirement date” in the Income Tax Act changed and reaching “the last date” did not mean that one automatically reached “retirement date” and had to retire. “Retirement date” only occurs when the member “elects” to retire subsequent to having a right to retire in terms of the fund rules.
Since 2018 and 2019 respectively, a member also has a right to transfer a “retirement interest” (deferred benefit) to a retirement annuity fund or a preservation fund, and retire (elect “retirement date”) from there.
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When can it be retrenchment instead of retirement?
If an employment contract stipulates that the employee must retire from employment at a particular age such as age 65, (“the last date”) the employee will only be permitted to retire from the fund; or delay retirement date by becoming a deferred member of the fund or by transferring to a retirement annuity fund or a preservation fund. The member may no longer has the right of withdrawal from the fund.
However, if the employer is retrenching employees who have not yet reached “the last date”, the employer has a choice whether the exit event is determined to be “retrenchment” or “retirement”.
If the exit event is retrenchment, the member will still be entitled to withdraw from the fund. The member might choose to partially withdraw and preserve in a preservation fund where a further right of withdrawal is allowed.
However, if the employer determined the exit event to be retirement, then the same rules will apply to the member as apply to a person who has reached “the last date”.
Regardless of the above, no case is a one size fits all situation. A person who is being retrenched might want to retire immediately and would want the employer to determine the exit event to be retirement. Retrenchment is a very difficult time in any person’s life. It is important to take advice from a financial adviser with expertise in this area.
