Pension Funds, Provident Funds & Retirement Annuities ExplainedThere's more than one way to save for your retirement in South Africa. Meet them all here.
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Most people have heard of pension funds, but did you know there are other ways to build your retirement savings? There are lots of options out there, and they can be a little overwhelming. We’re here to help by explaining what the differences are between pension funds, provident funds, and retirement annuities. By being more informed, you can make better, smarter financial decisions about your retirement planning.

Pension Funds

You can only join a pension fund through a company that employs you. With a pension fund, your money is managed by appointed trustees. They decide which assets to include in the fund. Contributions to your pension fund (yours and your employer’s) are tax deductible up to certain limits.

What happens with my pension fund when I 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, and this income/annuity is taxable.

If your total retirement interest in the fund is less than R247,500 you’re not limited to taking only 1/3 of your savings as a lump sum. You can take the full amount as a cash lump sum, subject to tax.

What happens to my pension if I leave a company before I retire?

If you leave a company before you retire, for example when you resign, you may have to move your retirement savings out of the company fund. You can move your savings either to:

  • your new company’s pension fund,
  • a preservation fund,
  • or to a retirement annuity fund.

You can also take up to a third as a cash payout. However, the cash payout will be subject to tax.

The growth and income within your fund while you’re a member of the fund is tax free. Tax is only payable when you access your funds.

If you don’t have access to a pension fund at your workplace, speak to a financial adviser about setting up your own retirement savings plan.

Provident Funds

What’s the difference between a pension and a provident fund?

A pension fund is a retirement fund that receives frequent contributions (usually monthly) from you and your employer. At retirement, you can access up to one third of the benefit in cash, and the remaining two thirds must be used to purchase an income annuity.

A provident fund is the same as a pension fund, but prior to 1 March 2021, it differed in that when you resigned or retired, you could take the entire sum as cash, which you’d be taxed on. You wouldn’t need to purchase an annuity. With the retirement reforms introduced from 1 March 2021, provident funds are now more similar to pension funds, and the following now applies:

  • Fund members are required to take a third of the benefit as a lump sum.
  • They must use the remaining two thirds to buy a pension that provides a monthly income.

Your age impacts how you draw on your provident fund. Learn more about how these changes to provident funds affect you.

What happens to my provident fund if I leave the company before I retire?

If you leave a company before you retire, for example when you resign or are retrenched, you may have to move your retirement savings out of the company fund. You can move your savings either to your new company’s fund, a preservation fund, or to a retirement annuity fund.

You can take a cash payout, but you should be aware that this cash payout will be subject to tax. 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.

What is a preservation fund?

This is a retirement fund which is specifically designed to receive lump sum benefits from a pension or provident fund when you resign from your employment before retirement. While the funds are in the preservation fund, the capital continues to grow. You can make one partial or full withdrawal from the fund before you reach age 55. After that, you can only access the balance after age 55.


Retirement Annuities (RA)

With a retirement annuity (RA), you also make monthly contributions, usually via debit order, but this is completely independent from your employer. You can choose the funds you want to invest in within the limits set out by the retirement fund regulations. These funds are called Regulation 28 funds.

How does a retirement annuity work?

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) from your retirement annuity. The balance must be used to purchase an income annuity (the income annuity is taxable).

If the total amount in the fund is less than R247,500 you’re not limited to taking only 1/3 of your savings as a lump sum. You can take the full amount as a cash lump sum, subject to tax.

Changing jobs will make no difference to your retirement annuity, as it’s independent of your employer.

Watch this video to learn more about pension and provident funds and retirement annuities.

What’s the difference between a life or living annuity and a retirement annuity?

Life or living annuities are post-retirement plans that you purchase when you are ready to retire. These products allow you to re-invest your money post-retirement and select the income you want to receive. Read more about living annuities and other types of post-retirement plans.

How do you calculate how much you need for retirement?

If you want to work out what your end goal (i.e. your final annuity amount) should be, take a look at our free online retirement annuity calculator for an estimate.

Further Tax Information for Retirement Plans

Your employer’s contribution to your retirement fund (pension fund or provident fund) is a fringe benefit taxed in your hands. A fringe benefit is an employment benefit (such as a pension or a paid holiday) granted by an employer and has a monetary value that doesn’t affect basic wage rates. The employer pays tax on this benefit.

Furthermore:

  • Your own contributions to your retirement fund plus your employer contributions to your retirement fund, are tax deductible up to certain limits, in your hands.
  • The growth and income within your fund while you’re a member of the fund is tax free.
  • Tax is only payable when you access your funds.

Need help with your finances?

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