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Retirement Annuity vs Pension Fund: What’s the Big Difference?

By July 16, 2020January 4th, 2021FinGlobal

Retirement Annuity vs Pension Fund: What’s the Big Difference?

July 16, 2020

difference-between-retirement-annuity-and-pension-fund

If you’ve ever found yourself awake at 3AM, pondering the big questions in life – like, what’s the difference between retirement annuity and pension fund –  then this post is for you. Read on!

What is a Retirement Annuity?

A retirement annuity is a voluntary private retirement investment product that you buy in order to save for your retirement. You choose how much to contribute to your retirement, and these contributions are deductible on your annual tax return.

What do you need to know before you commit to a retirement annuity?

  • Retirement annuities in South Africa are governed by the Income Tax Act (58 of 1962) and no withdrawals are allowed with exceptions for early retirement due to illness or disability, and formal emigration.
  • When you retire you are allowed to access a third of the funds in your retirement annuity as a lump sum withdrawal, and it is possible to take up to R500 000 tax free.
  • The remaining two-thirds of your retirement annuity funds must be used to purchase an annuity that can provide you with a regular pension income (also taxable) for your lifetime.
  • You can also choose not to take a lump sum withdrawal at retirement and apply your full savings amount toward your pension provision.

What is a pension fund?

A pension fund is a savings vehicle to which you can only gain access through an employer. This money is managed by the trustees of the company’s pension fund and your contributions are usually matched (up to a certain limit) by your employer, with both contributions being tax deductible.

What do you need to know before you commit to a pension fund?

  • When you retire you’re allowed to take up to one third of your savings as a lump sum withdrawal, which is (of course) taxable.
  • Because a pension fund is linked to your employment if you leave that company before you retire, you can move your pension savings out of your employer’s pension fund into your new employer’s fund, or into a preservation fund.
  • At this point you also have the option to take the funds as a cash payout, but this is not the smartest move to make as this will be taxed by SARS and can jeopardise your future by putting you back at square one with your retirement savings.

What are the main differences between a pension fund and a retirement annuity?

A retirement annuity is a personal retirement savings product and a pension fund is a savings vehicle that you access through your employer.

Need to access your South African pension fund?

You can make a request to the specific fund administrator to withdraw the full value of your pension fund, but your eligibility to do so will depend on certain factors:

  • Legislative limitations (the general rule is that you cannot withdraw except on retirement, retrenchment or resignation)
  • Specific fund rules and what type of fund it is
  • Whether you’ve made any previous withdrawals
  • Your age and residency status when contributing/withdrawing

Your application will be based on assessment of your eligibility. Once approved the funds can only be paid out into a South African bank account, after which it’s a simple matter of moving this offshore using your foreign investment allowance. Bear in mind that you’ll be taxed on this pension fund withdrawal.

Need to access your South African retirement annuity?

Although legislation prohibits you from touching this money as long as you are considered a South African resident for exchange control purposes, the good news is that you can withdraw the funds contained in your retirement annuity. All it takes is for you to complete the process of financial emigration.

FinGlobal: cross-border financial specialists

Still got questions about retirement annuities and pension funds? Or maybe you’re living abroad and you’d like to move your retirement savings offshore in order to protect them from the volatility of the Rand? FinGlobal can help you every step of the way.

What else can we help you with? You only have to ask:

  • Tax clearance and refunds for South Africans living abroad
  • Advice on expat tax
  • Exiting the South African tax system
  • Foreign exchange transactions
  • Inheritance payouts
  • Pension income transfers
  • Exchange control

Why should you choose FinGlobal? We’ve already helped more than 60 000 clients across the world, but don’t take our word for it. Read what our clients have to say.

Interested in learning more about financial emigration and accessing your retirement annuity or pension funds? Leave us your contact details, and we’ll be in touch.

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