
You may ask, "so why the long list of Finance Ministers had such difficulty implementing it?". The short answer is labour unions. The unions and other stakeholders argued that the rule would erode workers' rights and benefits. But first, let's go back to the basics.

### What is the tax alignment?

The tax alignment has long been an attempt by the government to harmonise the tax treatment between all retirement products while also preventing people from misusing their retirement savings when they retire.

Previously, pension and retirement annuity fund members could only take one-third of their savings as a lump sum when they retired and had to use the rest of the money to save and get regular income for life. On the other hand, the provident fund members could take their entire savings as a lump sum and use it as they see fit. This misalignment made the provident fund more favourable and flexible for the savers, and the South African Government did not like it.

### Why was the tax alignment introduced?

History shows that most people are not disciplined enough to handle large amounts of money and make it last for the rest of their life. People would typically blow their savings and become reliant on social grants (i.e. the government).

However, the Finance Minister would probably go to great lengths to stress that the reasons are more to create more consistency and fairness in how retirement savings are taxed. We view this as a half-truth.

### What does this mean for you?

If you are a member of a provident fund or a provident preservation fund, you should be aware of how will this affect your retirement savings. Some of the things to consider:

- You will have less access to cash at retirement. That means you have to be careful with your spending and budgeting.
- Start planning early and carefully for your retirement income needs and choose an annuity that suits your lifestyle and circumstances.

Got more questions? Connect with us at [connect@onemoola.com](mailto:connect@onemoola.com) or any of our social media channels.


What the Tax Alignment Rule Means for Your Provident Fund


### What is the Two-Pot Retirement System?

The two-pot retirement system divides retirement savings into two pots: an accessible pot and a retirement pot. The accessible pot allows members to withdraw up to one-third of their contributions plus investment returns once a year, subject to tax and preservation requirements. The retirement pot requires members to annuitize at least two-thirds of their savings on retirement, ensuring they receive a regular income for life or a fixed period.

### Benefits of the Two-Pot Retirement System
 
This innovative reform will provide short-term benefits, allowing members to access their funds during times of financial distress, without compromising their entire future income. It will also encourage more people to join formal retirement funds, making retirement savings more accessible and attractive, and boosting economic growth and development by increasing domestic savings and investment levels.

### Long-term benefits of the Two-Pot Retirement System

The two-pot retirement system will also ensure that retirees have adequate income by preserving most of their savings until retirement, reducing the risk of outliving their savings or relying on others for support in old age. It will also enhance its role as a driver of economic transformation.

### Implementation of the Two-Pot Retirement System

The two-pot retirement system is expected to be implemented in 2024/2025, applying to all members who join after that date. Members who joined before the implementation date will have their existing savings vested in a separate pot that will follow the current rules.

### Conclusion

Overall, the two-pot retirement system is a bold and innovative reform that promises to transform retirement in South Africa. It balances the need for liquidity with the need for security, allowing some access to one's savings while preserving most of them for retirement. So, start planning for your future with peace of mind, knowing that your retirement savings are in good hands with the two-pot retirement system.


Introducing the Two-Pot Retirement System: A Game-Changer for South Africans


> Read [The Reserve Banks' Dilemma: The balancing act](https://onemoola.com/blog/the-reserve-banks-dilemma)

As thought-provoking as our previous blog post is - you might be left thinking and asking yourself so what? Especially when you are still young, it's easy to overlook the impact of rising inflation and interest rates on retirement savings - which looks far away. Ignoring these factors could negatively impact the lifestyle you will afford when you decide to retire, and it's worth at least be aware of them.

### The Impact of Rising Inflation

When investing for retirement in the long term, it's critical to consider the impact of rising inflation. Over time, inflation can erode the purchasing power of your savings, meaning that your money will buy fewer goods and services in the future. This is especially important when living in South Africa where inflation has historically been high.

### The Impact of Rising Interest Rates

Interest rates also play a significant role in long-term retirement savings in South Africa. When interest rates rise, the value of some investments, such as bonds, can decrease. So, what can young investors do to protect their retirement savings from the impacts of rising inflation and interest rates in South Africa?

### Diversify Investments Across Different Asset Classes

One strategy is to have a well diversified portfolio by investing across different asset classes, such as shares, bonds, and real estate. A well diversified portfolio can help you reduce the overall risk and provide a hedge against inflation and interest rate fluctuations.

Your portfolio would ideally also include the inflation-protected securities, such as inflation-linked bonds issued by the South African government. These investments are designed to keep pace with inflation, which can help to protect the purchasing power of your retirement savings over time.

### Be Proactive in Managing Finances

Don't let economic volatility in South Africa catch you off guard. Plan ahead and protect your retirement savings with these strategies. This may mean seeking the advice of a financial advisor, or use the free financial tools like the Onemoola useful tools for additional support.


The Reserve Banks' Dilemma: Why the young should care?


Last week I read an article from the Unhedged article by Robert Armstrong - titled [Is the Fed ignoring market risk?](https://www.ft.com/content/a40baecd-6ba7-465a-9661-017cb17d0bf1) - made me think about the role of the reserve banks in the economy and financial markets.

For the uninitiated, the Fed ([The Federal Reserve](https://www.federalreserve.gov/aboutthefed/the-fed-explained.htm)) is the central bank of the United States that is responsible for printing money, among other things.

To save you a read, but I strongly recommend reading it, the essence of the article is asking whether it is the Fed's role to listen to the market and control the market risk? This question is not straightforward as it sounds because the formal mandate of the reserve banks is to keep the economy stable - implicitly to protect the ordinary Joe. However, the how of this critical mandate is left to the central bank to decide.

The Unhedged article argues that the reserve bank must be able to "jawbone the market" for it to be able to keep the economy stable.

### The market vs consumer

But what happens when keeping the economy stable means the reserve bank has to decide between the market and the consumer? For example, in South Africa, the reserve bank (SARB) has to fight the market in pursuit of a stable Rand by raising the interest rate, even though this comes at a cost for the consumer.

Should the SARB raise the interest rate to attract foreign currency, raising the demand for the Rand, thereby making the Rand relatively stronger or at least not become weaker?

### Unchecked power

This seems unfair to the consumer when the movements of the Rand are driven by the international markets - in high oil prices and a strong dollar. In defence of the SARB - as if they need one - their primary mandate from the constitution is ["to protect the value of the currency in the interest of balanced and sustainable economic growth"](https://www.resbank.co.za/en/home/about-us).

Should they broaden their mandate to take into account the squeezed consumer? Even when we know that a broad mandate comes with more power. We all know the saying goes, "great power comes great responsibility". Who would bet against a possibility of a bad actor capturing SARB and its power going unchecked? We all know how this will turn out.

### So what?

As a person on the street you might be thinking to yourself so what? On our next post we give factors and reasons on why you should care.

> Read [The Reserve Banks' Dilemma: Why the young should care?](https://onemoola.com/blog/the-reserve-banks-dilemma-why-the-young-should-care)


The Reserve Banks' Dilemma: The balancing act


The tax officer asks you whether you would like extra cash each month with little effort on your side.

You'd probably say yes. Who wouldn't want extra cash, especially from a government entity known for only taking money? The tax officer then continues,

> Each time you save money for your retirement into a regulated fund, I will give you 30% cashback.

### What’s the catch?

You think about it for a moment, and then you ask what’s the catch. After all, there is no such thing as a free lunch. The tax officer smiles and says you only need to promise you will use that money for what it’s intended - for income at your retirement.

Would you take it? You probably would because not taking would be you leaving money on the table.

> You leave money on the table when you take less than what is available.

Most South Africans - which might include you - leave money on the table every month as they do not take advantage of this simple retirement tax rule.

### Hang on. What’s the retirement tax rule?

As part of the [South African Income Tax Act](https://www.sars.gov.za/faq/faq-what-is-the-impact-of-section-11k-on-me-as-a-taxpayer/), all contributions to the retirement annuity, pension or provident fund are tax-deductible - up to R350,000 a year. In simple terms, you get money back or get taxed less when you save for your retirement.

If you take a moment to think about it - the South African Government essentially gives you money for doing what is good for your financial well-being. However, very few people take advantage of this offer - which I find puzzling.

### The psychological bias

This puzzling people's behaviour made me research more on what would be plausible reasons. I concluded it has to do with how our human minds are wired, particularly the [loss aversion](https://en.wikipedia.org/wiki/Loss_aversion) psychological bias.

#### Loss aversion bias

The loss aversion bias means we experience more pain from losing than the pleasure of gaining. When it comes to money, we feel more pain in losing than the joy of getting the same amount. If you don't believe me, think about the last time you played the lottery and lost R 10, and then another time you won R 10. You probably felt more pain from losing it than when you won it.

This psychological bias explains why we would not take advantage of the cashback from the South African Revenue Service (SARS). We feel more pain in saving our income - as it feels like a loss than the feeling of the gain of the tax deductions and our future income when we retire.

### So, how do we overcome it?

The first step is awareness - we cannot hope to change something if we're not even aware of its existence.

1. The awareness of the SARS Income Tax Act rule and how you're losing money by not taking advantage of it would go a long way.
2. And the awareness of the human biases we view and assess the world around us.

Once we have awareness, we can work on changing our frame of things as either losses or gains. It's easy to view the monthly retirement savings as losses as they reduce your take-home pay. But it's a financial gain both from the tax and well-being perspective.

> To help you with a mind shift and visualise the gains of saving for your retirement, we've created this free Onemoola Income Tax Calculator.

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  class="ant-btn ant-btn-primary ml-3"
  onClick={() => {
    window.open(
      'https://open.onemoola.com/calculator/income-tax/welcome',
      '_blank'
    );
  }}
>
  Go to Income Tax Calculator
</button>


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