Pension funds, provident funds, pension preservation funds – they all sound the same, right? Not exactly. There are a few major differences and similarities between these retirement investment vehicles; and it’s worthwhile taking the time to read further in order to arm yourself with knowledge for the future.
What is a pension fund?
- Retirement savings vehicle that is offered by your employer (i.e: an employment benefit).
- Investments are managed by company pension fund trustees and your pension fund contributions are generally matched by your employer.
- Both pension fund contributions are tax deductible to a certain point.
What happens with a pension fund when you retire?
- At retirement age, you’ll have access to one-third of your pension fund savings, which you can take as cash subject to the lump sum withdrawal tax payable to the South African Revenue Service.
- The remaining two-thirds must be used to provide you with a regular pension income, which is also taxable.
- If you choose not to take the one-third withdrawal on retirement, you can apply the full value of your savings to pay out a pension income.
What happens to your pension fund if you are no longer employed by that company?
You have three choices if you leave your employer before retirement:
- Leave your funds where they are.
- Transfer the resignation benefit to a pension provident fund, your new employer’s pension fund or into a retirement annuity.
- Withdraw your fund value as a lump sum (subject to income tax).
Interested in getting your hands on your existing pension fund savings?
What is a provident fund?
- A provident fund is similar to a pension fund in that it is a retirement savings vehicle offered by a company as an employee benefit.
- Provident funds are regulated in terms of the Income Tax Act and the Pension Funds Act.
- You and your employer will both pay into your provident fund and enjoy a tax deduction for these contributions.
What happens with a provident fund when you retire?
- Once you reach retirement age, your provident fund allows for unlimited access to your fund’s full value.
- This you can access as a lump sum (remember that lump sum tax!), or use to provide for your regular pension income, which is also taxable.
What happens to your provident fund if you are no longer employed by that company?
When you switch jobs before retirement age, you have three choices:
- Leave your funds untouched in the provident fund.
- Transfer your resignation benefit to a provident preservation fund or your new employer’s provident fund or a retirement annuity.
- Withdraw the fund value as a lump sum subject to lump sum withdrawal tax.
Can you access your provident fund before you retire?
- The expiry of a visa or financial emigration will trigger the resignation benefit, giving you full access to the funds.
What is a preservation fund?
- A savings vehicle into which the proceeds from a pension or provident fund are paid.
- A preservation fund is intended solely to house (and preserve) the proceeds from pension or provident funds.
- Preservation funds are offered by insurance companies and governed by the South African Income Tax Act and the Pension Funds Act.
- You cannot make contributions to a preservation fund, but you can use it to house proceeds from more than one source, as long as the fund source type is the same. This means you can only make transfers from pension to pension preservation funds or provident to provident preservation funds.
- Proceeds are usually transferred to a preservation fund when you leave the company you’re working for because you’ve resigned, been dismissed or retrenched.
- Once money has been transferred into the preservation fund, you will be given the opportunity to make one lump sum withdrawal before official retirement (don’t forget that tax!).
- This means that it is possible, with a preservation fund, to access part of, or the full value of your fund before retirement.
Can you access your preservation fund early?
Thanks to legislative changes, from 1 March 2019 you’ll be able to access the funds in your preservation fund in the same manner as retirement annuities and pension funds – by means of financial emigration or the cessation of your South African visa. Once you are a financial emigrant you will be able to access funds in a preservation fund even if you’ve used your one withdrawal option.
FinGlobal: financial and tax emigration specialists
If you’ve still got questions about pension funds, provident funds and preservation funds, we’re ready to listen, answer and offer objective advice on your options. FinGlobal has been providing cross-border financial services to South Africans all over the world and we’re ready to help you with:
- Cashing in your retirement annuity
- Withdrawing your pension, provident or preservation fund
- Making international transfers and foreign exchange
- Getting tax clearance or tax refunds
- Completing the process of financial emigration
- Exiting the South African tax system
- Sending your pension income abroad
Interested in learning more about financial emigration and accessing your pension, provident or preservation funds? Leave us your contact details, and we’ll be in touch.