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Provident Fund vs Retirement Annuity

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…

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. 

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