Pension fund vs provident fund vs retirement annuities in South Africa

Update: This article has been updated with the correct status of legislation regarding provident funds.

The National Treasury calculates that only around 6% of South Africans are on track to retire comfortably, which means it is crucial to start saving towards one’s retirement as early as possible, says CEO of Fedgroup Walter van der Merwe.

He said that the hard truth is that most people have to retire, whether they have a choice in the matter or not.

“Even if you still have a bond or car to pay off, and a family to support, once you hit the retirement age, most companies will send you packing,” he said.

To maintain your standard of living, a proper retirement plan will help ensure sufficient income once permanent employment is no longer an option, said van der Merwe.

He said that the general rule is that you should consistently save between 15% and 20% of your monthly salary between the ages of 20 and 60, to retire comfortably.

An increasing number of funds in South Africa offer their employees variable contribution rates, from 5% to 20% of their annual salary, he said.

“A carefully considered retirement plan needs to take into account all your expenses – big and small, as well as planned and unplanned, to ensure that you put away sufficient savings every month.”

Van der Merwe said that 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?

Currently, the differences between these three savings vehicles are substantial, but coming legislation may make them very similar, he said.

Pension fund

A pension fund can only be joined through a company that employs you, and 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/annuity, which is also taxable.

“If you leave the company before retirement, you can move your retirement savings out of the company fund, either to your new employer’s fund, a preservation fund or a retirement annuity fund, or take a cash payout, which is taxed,” the financial expert said.

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/annuity fund that pays you a monthly income.

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

Retirement annuity

A retirement annuity fund, to which you also make monthly contributions, is completely independent of your employer, allowing you to choose what funds you invest this money in (limited by retirement fund regulations), said van der Merwe.

“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/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,” he said.


Read: The most common reasons why loans are rejected in South Africa

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Pension fund vs provident fund vs retirement annuities in South Africa