Topics & Tax

Everything you need to understand about the financial side of retrenchment — explained clearly, without jargon.

The basics

Not everything you receive is taxed the same way

Income Type	How It's Taxed	Notes
Salary (final month)	Marginal income tax (PAYE)	Normal rates
13th cheque / bonus	Marginal income tax	Added to your regular income
Leave pay	Marginal income tax	Treated as ordinary income
Notice pay	Marginal income tax	Treated as ordinary income
Severance pay	Retirement Lump Sum Tax Table	First R550,000 tax-free (lifetime, cumulative)
Pension / Provident Fund lump sum AT retrenchment	Retirement Lump Sum Tax Table	Shares the same R550,000 tax-free pool as severance
Pension / Provident Fund transfer to Preservation Fund	Tax-free	Smart choice if you don't need the cash
Withdrawal from Preservation Fund LATER (before retirement)	Withdrawal Benefit Tax Table	Less favourable — tax starts at R27,500
Two-Pot Vested Component (savings before 1 Sept 2024)	Retirement Lump Sum Tax Table	Shares R550k pool — can be cashed out at retrenchment
Two-Pot Savings Component (1/3 of post-Sept 2024 contributions)	Marginal income tax	Added to your annual income — may push you into a higher tax bracket. Minimum withdrawal R2,000, no maximum, limited to once per tax year (1 March–28 February), admin fee applies
Two-Pot Retirement Component (2/3 of post-Sept 2024 contributions)	Cannot be withdrawn — must be preserved	Tax-free transfer. Locked until retirement

⚠️ The R550,000 is a LIFETIME limit — and it's cumulative.

Your R550,000 tax-free pool is reduced by any previous severance benefits OR retirement fund lump sums you've received. If you took a R100,000 pension withdrawal when you changed jobs in 2015, you only have R450,000 of tax-free room left.

This matters more than people realise. Before you accept a package or cash in a fund, we should check what's left in your pool.

"This is general guidance — your specific numbers depend on your income, years of service, and the lump sums you've received in your lifetime. Want exact figures based on your tax history? Request your free Tax Snapshot below."

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Section 2

Severance Pay & Tax

📌Severance pay is typically one week's remuneration per completed year of service (BCEA minimum)
📌Taxed using the Retirement Lump Sum Tax Table — the favourable one
📌First R550,000 is tax-free — but this is a lifetime allowance shared across all retirement lump sums and severance benefits you've ever received
📌Leave pay, notice pay, and pro-rata bonuses are NOT part of severance — they're taxed at your normal income tax rate and require a separate tax directive

Talk to Lee about your severance →

The SARS Tax Directive — why HR getting this right matters

Before your employer can pay you a single rand of severance, they must apply to SARS for a Tax Directive using the IRP3(a) form. SARS then calculates the exact tax that must be deducted, and only then can your employer pay you. You cannot submit this form yourself — it has to come from your employer.

This is where things often go wrong. The "Reason" code your HR selects on the IRP3(a) determines which tax table SARS applies:

✅"Severance benefit – Involuntary retrenchment" → Favourable retirement lump sum tax table (R550k tax-free pool)
⚠️"Severance benefit – Voluntary retrenchment" → Historically processed at the normal tax tables, leading to overtaxation. SARS has clarified this should also use the favourable table, but it depends on how HR processes it
❌Wrong source code on your IRP5 (e.g. code 3907 instead of 3901) → SARS treats the lump sum as normal income, and you lose the R550,000 tax-free benefit entirely

What to check

🔎Your IRP5 must show source code 3901 for the severance amount and 4115 for the tax withheld
🔎Ask HR for a copy of the Tax Directive itself — it's your proof of what was applied for
🔎If your tax directive is wrong, your final tax position only gets corrected when you file your annual return — and over-tax is recovered slowly, if at all

This is one of the most common areas where retrenched employees lose money unnecessarily — and one of the easiest to fix if caught early.

Section 3

Your Pension / Provident Fund

You have 3 options when retrenched:

Option 1 — Cash withdrawal

•Taxed using the Retirement Lump Sum Tax Table (favourable)
•Uses the same R550,000 tax-free pool as your severance
•If your severance + lump sum exceeds R550,000, you pay tax on the excess
•Once it's gone, it's gone — no retirement savings

Option 2 — Transfer to a Preservation Fund

•Tax-free transfer
•Keeps your retirement savings invested and growing
•You can still access it later if needed (but if withdrawn before retirement, the less favourable withdrawal table applies)
•Usually the smart choice

Option 3 — Transfer to an RA or new employer's fund

•Tax-free transfer — either to a Retirement Annuity with a provider of your choice (Allan Gray, Glacier, Liberty, Sanlam, etc.) or to your new employer's fund (if they accept it)
•An RA gives you investment choice and control — you're not limited to whatever fund your next employer happens to offer
•Continues your retirement journey seamlessly

Important: The Two-Pot system (effective 1 September 2024) has changed the rules. Your fund is now in three components, each with different retrenchment rules:

Vested Component (everything saved before 1 Sept 2024): Can still be fully cashed out at retrenchment — uses the favourable Retirement Lump Sum Tax Table (sharing the R550k pool with severance).

Savings Component (1/3 of contributions after Sept 2024): Can be withdrawn at retrenchment (or once per tax year anytime). Taxed at your marginal income tax rate — added to your annual income, so it may push you into a higher tax bracket. Minimum withdrawal is R2,000, no maximum, limited to once per tax year (1 March to 28 February), and an admin fee applies.

Retirement Component (2/3 of contributions after Sept 2024): Cannot be withdrawn at retrenchment. It must be preserved (tax-free transfer) and stays locked until retirement, when it must be used to buy an annuity.

This is why "should I cash out my fund?" no longer has a simple answer. Talk to me before you decide.

Get advice on your fund →

Section 4

Medical Aid After Retrenchment

•Your group medical aid usually ends within 30 days of employment ending
•Don't cancel it impulsively — once you're off for more than 90 days, full underwriting kicks in (3-month general waiting periods, 12-month condition-specific waiting periods, and possible late-joiner penalties if you're over 35)

Options

Continuation to individual / direct paying membership

•Convert your group cover to individual membership on the same scheme
•No new waiting periods if done within the conversion window (typically 30 days)
•You complete a continuation form, supply ID + bank letter, and the scheme debits you directly
•Critical if you have chronic conditions

Join your spouse's medical aid

•Usually possible within 30 days of losing your own cover (life event)
•Get a Certificate of Membership from your current scheme — it reduces or avoids underwriting and late-joiner penalties

Choose a new scheme

•Waiting periods might apply, depending on your membership history and the scheme's rules (typically 3-month general, 12-month condition-specific)
•Late-joiner penalties might apply if you've been without medical aid and you're over 35

Gap cover

•Your group gap cover ends with employment
•In many instances, you can switch to an individual paying gap cover policy — slightly higher premium, but no break in cover

⚠️ Medical Savings Account (MSA) clawbacks — easy to miss:

Many schemes pay your full annual MSA allocation in January, but you contribute to it monthly throughout the year.

If you've used your full MSA but only contributed (say) 6 months' worth, you may owe the scheme money for the unused months.

Contact your scheme to check your MSA balance before you leave so there are no surprises.

Let's sort out your medical aid →

Section 5

Group Life & Disability Cover Continuation

This is the most overlooked thing in retrenchment — and the most expensive mistake.

What happens: Your group life and disability cover ends with employment. You may be uninsured from day one after leaving.

The conversion / continuation option

•Some group schemes offer it, some don't
•Where available, you can convert to individual cover without medical underwriting
•Typical window when offered: 31 to 60 days (varies by scheme)
•Premiums will be at individual rates (more expensive than group rates) — but the cover is yours

Important caveat: Some group schemes specifically exclude the conversion option in Section 189 retrenchments. This means even if your scheme normally allows continuation, it may not in a formal retrenchment. Always check with your HR or scheme administrator first — don't assume.

Voluntary additional cover: If you had voluntary additional risk cover (over and above the basic group cover), this often can be converted to individual cover. Worth asking specifically.

Why this matters

•If you have chronic conditions, recent illnesses, or are not in optimal health, the conversion option may be the only way you can get cover going forward
•New individual applications require full medical underwriting — you could be declined, rated up, or excluded for pre-existing conditions
•Once the window closes (if it was available), you cannot exercise it later

Get your cover sorted before the window closes →

Section 6

Don't Forget

A few things people often miss:

Credit and bond insurance

Most home loans, vehicle finance, credit cards, and personal loans include credit insurance that covers retrenchment. Claim it. Contact each lender and ask for the retrenchment claim process.

Third-party debit orders running through payroll

Anything your employer deducted from your salary on behalf of a third party — funeral cover, garnishees, maintenance orders, voluntary insurance — will stop the day your employment ends. Set up direct debit orders with each provider yourself, or your cover lapses.

Beneficiary nominations

Your group life nominations are about to fall away. Make sure your replacement cover (and any retirement annuities, preservation funds, etc.) have current beneficiary nominations.

Your Will

If your circumstances have changed significantly — or if you're about to receive a substantial lump sum — it's worth reviewing your Will. Estate planning becomes more important when you have a lump sum in the bank.

Tax year timing

If you're retrenched in February versus March, your tax position can differ significantly because severance and any income may fall in the same tax year or split across two.