It’s easy to get confused, because they all sound so similar. Pension funds. Provident funds. Preservation funds. What’s the difference? While these are all South African retirement funds/savings vehicles designed to protect your retirement money, there are some key differences and similarities worth knowing, so let’s break it down for you.
What is a pension fund?
- This is usually an employment benefit – a retirement savings product that is offered by your employer as part of your package.
- Your monthly contributions are normally matched by your employer, and both pension fund contributions (i.e: the contributions made by yourself and your employer) are tax deductible to a degree.
- This company pension fund is managed by trustees.
What happens to your pension fund if you are no longer employed by that company?
If, for example, you have resigned from your employer because you are emigrating overseas, you have three choices when it comes to your pension funds:
- Allow your funds to remain where they are.
- Using the resignation benefit, transfer your money into a pension provident fund, or into your new employer’s pension fund or into a retirement annuity.
- Cash in your fund value as a lump sum (subject to income tax).
Interested in getting your hands on your existing pension fund savings? We can help.
What happens to your pension fund when you retire?
- From the age of 55, you’ll be able to access one-third of your pension fund savings. You are allowed to withdraw this as a lump sum, but the South African Revenue Service will want their cut of the pension fund pie.
- If you choose not to take the one-third cash option, you can use the full value of your savings fund in order to pay out a pension income during your retirement years.
What is a provident fund?
- It’s similar to a pension fund, in that it is usually an employee benefit that is offered by a company.
- You and your employer will make provident fund contributions, which are to a degree tax deductible.
- A provident fund differs from a pension fund, in that you can withdraw the full amount while a pension fund only allows for one-third lump sum payout.
What happens to your provident fund when you retire?
- Once you reach retirement age, your provident fund allows for unlimited access to your fund’s full value. That’s right. You can cash it ALL in. (Don’t forget SARS’ lump sum tax, though.)
- You have the choice to take the money and run, or you can use it to purchase an annuity that will provide a regular 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 as they lie in the provident fund.
- Use your resignation benefit to transfer your money to a provident preservation fund or your new employer’s provident fund or to a retirement annuity.
- Withdraw the fund value as a lump sum subject to lump sum withdrawal tax.
What is a preservation fund?
This is a financial product that is intended to preserve your pension or your provident funds, to keep them safe until retirement.
- A savings vehicle into which the proceeds from a pension or provident fund are paid, for example when you move employment.
- 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 regulated by the South African Income Tax Act and the Pension Funds Act.
- While you cannot contribute to a preservation fund, you can use one to house proceeds from more than one source, provided the fund source type matches. In other words, you can only make transfers from pension to pension preservation funds or provident to provident preservation funds.
- Once funds have been transferred into the preservation fund, you will have one final chance to make one lump sum withdrawal before official retirement age is reached. (Don’t forget SARS will want their lump sum tax!)
Retirement annuity vs preservation fund: what’s the difference?
A preservation fund is supposed to help you preserve your withdrawal benefits until you retire. It does this by ensuring that there is money to withdraw when you reach retirement age.
There are three major differences when it comes to retirement annuities and preservation funds:
- The ability to make ongoing contributions: A preservation fund is merely a holding place for transferring money from other funds. Unlike a retirement annuity, you cannot make ongoing contributions to a preservation fund.
- The ability to use your withdrawal benefit: Before retirement, you cannot withdraw your money from an RA (unless you cease tax residency and maintain this position for three years), while you can make full or partial withdrawal from your preservation fund before retirement.
- The amount which you can cash in on retirement: Once you’ve reached 55, you have the option to receive your entire fund balance as cash from your provident preservation fund. With a retirement annuity, you can only take one-third cash and you will need to invest the remainder in an annuity that will provide an income during your retirement.
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If you’ve still got questions about pension funds, provident funds and preservation funds, our team of experts is ready to listen and answer, providing objective guidance on your options for your financial future.
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