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Pension fund, provident fund, retirement annuity - what's the difference?

Jan 06 2020 22:07

One of the most commonly asked retirement questions is, what is the difference between a pension fund, a provident fund and a retirement annuity fund, according to Walter van der Merwe.

The CEO of investment and insurance company Fedgroup Life explains that in the past, the differences between these three savings vehicles were substantial - but recent legislation has made them very similar.

"Whichever option you choose is completely up to you, as long as you have all the right information and advice," says van der Merwe.

He compares the three retirement vehicles in more detail:

Pension fund

You can only join a pension fund, through the company that employs you. Your money is managed by the trustees of the fund. Your contributions as well as your employer's contributions are tax deductible up to a point.

Upon retirement, you can take up to a third of your savings in a cash lump sum, which is taxable. The rest must be used to purchase an income product or annuity, which is also taxable.

If you leave the company before retirement, you can move your retirement savings out of the company fund to either your new employer's fund, a preservation fund or a retirement annuity fund. You could also take a cash pay-out, which is taxed.

Provident fund

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 or annuity fund that pays you a monthly income. 

However, this legislation has not been applied and has been postponed until March 1, 2021.

Retirement annuity fund

A retirement annuity fund, to which you also make monthly contributions, is completely independent of your employer. It allows you to choose what funds you invest this money in - limited by retirement fund regulations.

Upon retirement, you are allowed to take a maximum of a third of your savings as a cash lump sum and the balance must be used to purchase an income product or annuity.

If you change jobs before retirement, this will not impact your retirement annuity, as you are not permitted to access any portion of these funds before retirement.

Compiled by Carin Smith

annuities  |  retirement  |  personal finance  |  money


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