Pension, Provident Funds & RAs

Most people have heard of pension funds, but what are the differences between a pension fund, provident fund and a retirement annuity?

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, that you are taxed on are tax deductible up to certain limits. 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, the income/annuity is taxable. If your total retirement interest in the fund is less than R247 500 you are 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.

If you leave a company before you retire, example where you resign, you may have to move your retirement savings out of the company fund, either to your new company’s fund, or to a preservation fund or to a retirement annuity fund or take a cash payout, the 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.

Provident Funds

If you leave a company before you retire, example where you resign, you may have to move your retirement savings out of the company fund, either to your new company’s fund, or to a preservation fund or to a retirement annuity fund or take a cash payout, the 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.

If you leave a company before you retire, when you resign for example, you may move your retirement savings out of the company fund: to your new company’s fund, or to a preservation fund or to a retirement annuity fund. Or you may a combination of cash and transfer to an approved fund.

Retirement Annuities (RA)

With an RA, 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).

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 (the income/annuity is taxable). If your total retirement interest in the fund is less than R247 500 you are 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.

If you change jobs, it makes no difference to your RA , i.e. you do not have access to the funds– your RA just continues.

Your employer’s contribution to your retirement fund (pension fund, provident fund or retirement annuity fund) is fringe benefit taxed in your hands. 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 are a member of the fund is tax free. Tax is only payable when you access your funds as discussed above.

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