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Pension fund Vs Provident fund

Retirement

Pension fund Vs Provident fund

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Pension funds and provident funds are very similar, but they are not the same. They are both vehicles that you can use to invest for your retirement, but there are some differences. Let’s explore this further:

Benefits (what you get from it)

Pension funds

…are primarily aimed at providing you with regular income when you retire. To this effect, upon retirement, you must turn at least two thirds of your fund into regular income by purchasing an annuity. You can then withdraw the balance as a lump sum after allowing for tax costs – which can be quite hefty!

Provident funds

… allow you to withdraw your entire fund at retirement! You’re not forced by law to buy an annuity with the fund, so you have the choice to literally withdraw the whole fund (again subject to tax).

Contributions (How you build up this fund):

Contributions are made to Pension and Provident funds by employers and employees. Your contributions are treated exactly the same with regards to tax. That is; the sum of your contributions is tax deductible, up to 27.5% of your annual income. There’s also an annual tax deduction cap of R350,000.

Note:
Due to the Retirement reform it is possible that, by 1 March 2018, it becomes compulsory for the member of a provident fund to turn at least two thirds of his/her fund into regular income by purchasing an annuity. (Just like it is for Pension funds). This is not the case at the moment, but may change. We will keep you updated.

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Benjamin

Benjamin is an Actuary working at a major financial services firm. He has experience in the valuation, design and distribution of wealth and investment products. Benjamin is insatiably passionate about teaching and empowering minds. All views expressed are Benjamin's own and neither reflect nor are influenced by the views of affiliated companies.

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