Tracey Jensen from 10x Investments explains the difference between pension fund and provident fund.

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As individuals, we often focus more on our day-to-day financial needs rather than on saving for the future. However, planning for our retirement is a vital part of our long-term financial planning. This is where provident funds and retirement funds come into play.

Provident funds and retirement funds are financial instruments that are designed to help individuals save for their retirement. Although these funds share similarities, they differ in several aspects.

What is a Provident Fund?

A provident fund is a type of defined contribution plan where both the employee and employer contribute towards the fund at regular intervals. These funds are administered by a trust that invests the contributions in different types of assets like bonds, equities, and other securities. The contributions by the employer and employee are tax-deductible up to a certain limit, and the income earned on these funds is also exempt from taxes.

One of the key features of provident funds is that they offer a lump-sum payout to employees when they retire or leave the company. The payout amount is calculated based on the contributions made by the employee, the employer’s contributions, and the returns earned on the investments made by the trust that administers the fund.

What is a Retirement Fund?

A retirement fund, on the other hand, is also a type of defined contribution plan that offers employees a way to save for their retirement. In a retirement fund, the employee contributes a percentage of their salary to the fund, and the employer may also make contributions. The contributions are invested by the retirement fund’s administrator in various types of investments, and the income earned by the fund is also exempt from taxes.

One of the key features of a retirement fund is that the payout to employees is typically in the form of an annuity, which provides a steady stream of income to the retiree for the rest of their life. The annuity amount is calculated based on the total amount accumulated in the fund, the expected returns on the investments, and the life expectancy of the retiree.

Key Differences between Provident Fund and Retirement Fund

The main differences between provident funds and retirement funds are as follows:

1. Lump-sum vs. Annuity: Provident funds offer a lump-sum payout while retirement funds provide a steady stream of income in the form of an annuity.

2. Tax on Payout: The amount received as a lump-sum payout from a provident fund is tax-free, but the amount received from a retirement fund annuity is subject to tax.

3. Contributions and Investment Management: In a provident fund, both the employer and employee contribute to the fund, and the investment management is handled by a trust. In a retirement fund, the contributions are primarily made by the employee, and the investment management is handled by the administrator of the fund.

4. Withdrawals: While premature withdrawals from a provident fund are allowed, withdrawals from a retirement fund are subject to penalties and restrictions.

Conclusion:

Both provident funds and retirement funds offer individuals a way to save for their retirement. However, each has its own unique features, and it is important to understand the differences between the two to decide which one is suitable for your financial goals. It is always advised to start saving for retirement as early as possible as it can help secure your financial future.