
Confused by the world of retirement savings? You’re not alone. Many people struggle to understand the difference between pension funds, provident funds, and retirement annuities. Here’s the key distinction: pension funds and provident funds are typically offered through employers, while retirement annuities are individual investment plans.
What is a Pension Fund?
A pension fund is a type of retirement savings plan offered by some employers. It acts as a pool of money set aside to provide you with a steady income stream after you retire. Here’s what makes it unique:
Employer-Sponsored: Unlike some retirement options, you can typically only join a pension fund through the company you work for. Your employer will offer the plan as part of your benefits package.
Professional Management: The money in the pension fund is managed by a board of trustees appointed by your employer and employee representatives. These trustees are responsible for investing the funds to grow your retirement savings.
Unlocking Your Pension at Retirement:
Imagine your pension as a treasure chest you fill throughout your career. At retirement, you get to crack it open! Here’s how it works:
Cash in Hand (with a Tax Bite): You can take up to one-third of your savings as a lump sum, but remember, this amount is taxable.
Guaranteed Income for Life (Taxable Too): The remaining two-thirds must be used to purchase an annuity, which provides you with a steady income stream throughout retirement. This income is also taxable.
However, there’s a size exception: If your total retirement savings in the fund are less than R247,500, you can take the entire amount as a lump sum, with taxes applied.
Provident Funds: Similar, Yet Different
Think of a provident fund as a close cousin to a pension fund. Since March 1, 2021, the rules have become more standardized. Traditionally, you could access your entire provident fund as a cash lump sum when you resigned or retired. But now, similar to pensions:
One-Third Lump Sum (Taxable): You’re required to take one-third of your benefit as a taxable lump sum.
Income for Life (Taxable): The remaining two-thirds must be used to purchase an annuity that provides you with monthly income, similar to a pension.
Leaving Your Job Before Retirement? Don’t Sweat It!
If you switch jobs before retirement, you won’t lose your provident fund savings. You have options:
Move it to Your New Employer’s Fund: Consolidate your funds for easier management.
Park it in a Preservation Fund: This option holds your savings until you retire, ensuring it stays invested for the future.
Invest it in a Retirement Annuity (RA): Take control and invest it in an RA for potentially higher returns.
The Power of Retirement Annuities (RAs):
An RA is your personal retirement savings plan, independent of an employer. Here’s the lowdown:
You’re in Charge: Choose the investment options within regulatory limits (28 funds) and set up monthly contributions through a debit order.
Accessing Your Nest Egg: At retirement (age 55 or older), the rules are similar to pensions and provident funds:
- One-Third Lump Sum (Taxable): You can take up to one-third of your savings as a cash lump sum, subject to tax.
- Income for Life (Taxable if over R247,500): The remaining amount must be used to purchase an annuity for a steady income stream. However, if your total savings are less than R247,500, you can access the full amount as a lump sum, with taxes applied.
Now you’re equipped to navigate the world of retirement savings! Whether you choose a pension, provident fund, or RA, remember: consistent contributions are key. Start early, invest wisely, and watch your nest egg grow, paving the way for a secure and fulfilling retirement.
Clarity Employee Benefits is an authorized Financial Services Provider – FSP No. 51007. We specialize in retirement funds, please do not hesitate to contact us if you are in need of guidance or advice.