This is an episode-based series where I will be walking through all of the aspects of retirement in South Africa, and explaining them. In today’s episode we will be discussing the main difference between pension, provident and retirement funds in South Africa.

Pension funds.
You can only join a pension fund through a company that employs you. With a pension fund, your money is managed by the trustees of your pension fund, and they decide which assets to include in the fund. Your contributions to the pension funds, and, your employers’ contributions, are tax deductible. When you retire, you may take up to a maximum of one third of your savings in a cash lump sum. This cash lump sum is taxable. The balance must be used to purchase an income annuity, it is extremely important to know that the income annuity is taxable just like a salary is taxable. If your total retirement interest in the fund is less than R247500 you are not limited to taking only one third of your savings as a lump sum, you can take the full amount as a cash lump sum, subject to tax.
If you leave a company before you retire, example where you resign, you have the following options. Either you can keep the money in the fund if the fund allows it, or you can move your retirement savings out of the company fund. The destination options for the balance may be, your new company’s fund, a preservation fund, a retirement annuity fund or take a cash payout. Please note that the cash payout will be subject to tax on the lump sum tax table. The growth and income within your fund while you are a member of the fund is tax free. Tax is only payable when you access your funds as discussed above.

Provident funds
A provident fund is different to a pension fund, in that you are able to withdraw the entire savings amount as a lump sum when you retire. Government is intending to align the benefits of provident funds to those of pension and retirement annuity funds. This means that provident funds will ultimately be essentially identical to pension funds. The result is that you will only be able to withdraw a third of your provident fund savings as a lump sum upon retirement, while the rest has to be invested in an income annuity fund that pays you a monthly income. However, this legislation has not been applied, and has been postponed. For now, one can withdraw the entire amount.

If you leave a company before you retire, example where you resign, you have the following options. Either you can keep the money in the fund if the fund allows it, or you can move your retirement savings out of the company fund. The destination options for the balance may be, your new company’s fund, a preservation fund, a retirement annuity fund or take a cash payout. Please note that the cash payout will be subject to tax on the lump sum tax table. The growth and income within your fund while you are a member of the fund is tax free. Tax is only payable when you access your funds as discussed above.

Retirement Annuituties (RA)
With, a retirement annuity, you also make monthly contributions, usually via debit order, but this is completely independent from your employer. You can choose what funds you invest this money in (within the limits set out by the retirement fund regulations). Meaning, with the help of an experienced investment specialist, the investor can invest in wide variety of funds, from shares, professionally known as equities, bonds, cash, such as money market accounts, and property.
When you retire, at age 55 or older, you’re allowed to take a maximum of one third as a cash lump sum (the cash lump sum is taxable) and the balance must be used to purchase an income annuity. If your total retirement interest in the fund is less than R247500, you are not limited to taking only one third of your savings as a lump sum, you can take the full amount as a cash lump sum, subject to tax. A bonus of a retirement annuity is that if you change jobs, it makes no difference to your retirement annuity, it will just continue as normal.
Your employer’s contribution to your retirement fund, is a fringe benefit, taxed in your hands. Your own contributions to your retirement fund, plus your employers contributions to your retirement fund, are tax deductible up to certain limits, in your hands. The growth and income within your fund while you are a member of the fund is tax free. Tax is only payable when you access your funds as discussed above.

Transfers

The Income Tax Act allows transfers from a pension or provident fund to a retirement annuity fund, pension preservation or provident preservation fund on or after reaching normal retirement age, as defined in the rules of the fund, but before retirement date. It is important to note that the single allowable withdrawal applicable to preservation funds will not apply to this transfer to a pension preservation or provident preservation fund….(read more)

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Pension Funds, Provident Funds, and Retirement Annuities are three common investment vehicles designed to provide individuals with financial security during their retirement years. While they all serve the purpose of saving for retirement, there are crucial differences between these options. Understanding their features and benefits is essential when planning for a comfortable future.

Pension Funds are typically employer-sponsored retirement plans established under a defined benefit model. This means that the employer guarantees a specified retirement income based on factors such as salary length of service. The contributions made towards these funds are deducted from the employee’s salary and invested on their behalf. Pension Fund investments are managed by professional fund managers who aim to generate returns to fund the promised retirement income. Once an employee reaches retirement age, the accumulated funds are used to provide them with a regular pension payment for the remainder of their life.

On the other hand, Provident Funds are similar to Pension Funds but function as defined contribution plans. This means that the amount of money available at retirement depends on the contributions made and the investment returns earned over the years. Employees, along with their employer, contribute a certain percentage of their salary to the fund, which is then invested in a range of financial instruments. At retirement, the accumulated funds, including investment returns, can be withdrawn in a lump sum or converted into an annuity payment.

Retirement Annuities, in contrast to the previous two options, are individual pension plans purchased privately. They are often suitable for self-employed individuals or those who want to supplement their existing pensions or provident funds. Retirement Annuities offer a tax-efficient way of saving for retirement. Individuals contribute a portion of their income into an annuity policy, which is managed by insurance companies or investment firms. These contributions grow over time, accumulating value until retirement. At retirement age, individuals can choose to receive the accumulated funds either as a lump sum or as regular annuity payments.

One of the primary differences between these three options lies in their flexibility and accessibility. While Pension Funds and Provident Funds are usually tied to employment, Retirement Annuities can be opened by anyone independently. Furthermore, Pension Funds and Provident Funds often have restrictions on how and when the funds can be accessed, typically only allowing withdrawals at retirement age. Retirement Annuities, on the other hand, offer more flexibility, giving individuals the choice to withdraw funds earlier, although penalties or tax implications may apply.

Another key difference is the level of risk involved. Pension Funds are managed by professionals who aim to provide a stable and secure retirement income, usually investing in a diversified portfolio. Provident Funds and Retirement Annuities, on the other hand, offer individuals greater control over their investment decisions. They have the flexibility to choose from various investment options, ranging from conservative to aggressive, depending on their risk appetite and desired returns.

When deciding which option is best for retirement planning, individuals need to consider their employment status, risk tolerance, and retirement objectives. Pension Funds provide a reliable yet inflexible retirement income, whereas Provident Funds and Retirement Annuities offer greater flexibility but require individuals to take on more responsibility regarding investment decisions.

In conclusion, understanding the differences between Pension Funds, Provident Funds, and Retirement Annuities is essential for individuals planning their retirement. While all three options aim to help secure a comfortable future, their structures, accessibility, flexibility, and risk levels distinguish them from one another. By considering personal circumstances and long-term goals, individuals can make informed decisions about which investment vehicle best suits their needs.