Today we continue with our March theme of looking at the recent changes to the South African retirement system that few seem to talk about or even be aware of. One rule that has been in the works for a long time is called the tax alignment rule. It was first proposed in 2012 and approved in 2015 by Parliament but was only implemented in 2021.

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.

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