A provident fund, like a pension, is a retirement fund offered by employers to their employees as part of their contract. It is also governed by the Income Tax Act and the Pension Funds Act. It is intended to provide for future retirement provisions once you reach formal retirement.

Both you, the employee, and the employer, your boss, will contribute to the provident fund. As a result, you’ll both enjoy a tax deduction for contributions made, as prescribed by the South African Income Tax Act. (Note -here, the employee is also referred to as the member of the provident fund.) If you, the member, reach your retirement age, which is generally determined by contract, the provident fund allows for your unlimited access to the fund value.

The member can then access the full fund value as a lump sum. However, you can elect to only take a portion as a lump sum and to apply the remaining funds to provide for the monthly pension or to apply the full fund value towards providing your retirement income. The lump sum will be subject to tax by applying the retirement lump sum tax table and the monthly pension option, if applicable, is also fully taxable.

When you switch jobs before retirement age, you have three choices. The first is to leave the funds in the provident fund. The second is to transfer the resignation benefit to a provident preservation fund or your new employer’s provident fund or a retirement annuity, and the third is to withdraw the fund value as a lump sum (or a combination of the last two options). Any lump sum will be subject to income tax and the withdrawal tax table will apply. Access to your provident fund cannot be gained due to physical emigration from South Africa or the expiry of a visa, however, the cessation (expiry) of a visa or financial emigration will have the same result as if the employee resigned from employment, which will then give you full access to the funds.

A preservation fund serves as a savings vehicle into which proceeds from a pension or provident fund are paid. The only purpose of a preservation fund is to house and preserve proceeds from pension or provident funds. It’s a South African retirement fund and governed by the South African Income Tax Act and the Pension Funds Act. Preservation funds in South Africa are offered by insurance companies.

Only fund transfers are possible to a preservation fund – pension funds are transferred to pension preservation funds and provident funds are transferred into provident preservation funds. You cannot make additional contributions to a preservation fund, but you can house proceeds from more than one source, only on the condition that the nature of the fund source is the same. That means you can only make transfers from pension to pension preservation funds or provident to provident preservation funds.

Proceeds are transferred to a preservation fund when you leave your job because you’ve been dismissed, retrenched or you’ve resigned. There is no tax consequence on the actual transfer, this part of the transaction is tax-free.

Once the funds are transferred into the preservation fund, you, the member of the preservation fund will be entitled to make a single withdrawal from the fund before your retirement. That means it’s possible to access part of, or the full fund value in the preservation fund prior to retirement. Once you’ve used your power of withdrawal, you will not be able to make another until you reach retirement age. (It’s useful to note that a withdrawal is possible per fund source transferred into the preservation fund.)

If the member retires from the preservation fund, the rules applied to retirement in the event of a pension preservation fund will be the same for the pension fund. In the event of a provident preservation fund, it will be the same as a provident fund.

From 1 March 2019, a member will be able to gain access to the funds in a preservation fund due to emigration or the cessation of their visa. This will be possible even if the one withdrawal option has been used – if it is prior to retirement.

A deferred member is someone who was a member of the employer’s pension/provident fund, and upon leaving their employment, chose not to withdraw/transfer the proceeds from that fund.

Before reaching retirement age, this member can still access their funds by way of a lump sum or a transfer to another approved fund. However, if the retirement date is met, the normal retirement rules will apply, depending on whether it is a pension or provident fund.

To summarise, access to pension/provident and preservation funds, prior to retirement is as follows:

• Upon resignation from employment, the member can access the full resignation benefit as a lump sum;
• If the member transferred the resignation benefit to a preservation fund, one withdrawal will be possible from the preservation fund prior to retirement;
• If the member emigrates or the visa expires prior to retirement, access to a pension or provident fund will be possible due to the resignation taking place (and not on account of the actual emigration);
• If the member emigrates or their visa expires prior to retirement, access to a preservation fund is possible prior to 1 March 2019 if the one withdrawal option has not been used. After 1 March 2019, the member will be able to gain access to the funds even if the one withdrawal was used prior to emigration/visa expiry.

The Second Schedule to the South African Income Tax Act prescribes how retirement lump sums are taxed. There is one set of rules that apply to pre-retirement withdrawals and another set of rules for lump sums taken upon retirement, death or as a result of a member’s retrenchment.

To determine the taxable lump sum the following steps are taken:

• Decide on the lump sum to be withdrawn from the retirement fund;
• Deduct the following amounts:
• Contributions made to retirement funds that did not qualify as a tax deduction;
• Add the following amounts:
  • Any retirement lump sum received after 1 October 2007;
  • Any withdrawal lump sum received after 1 March 2009;
  • Any severance benefit received after 1 March 2011;
• This will then be equal to the taxable lump sum;
• The next step is to determine the tax payable on this total aggregated taxable lump sum by using the applicable table below;
• In addition, the tax payable on all previous lump sums taken into account for aggregation purposes must be calculated using the tax table applicable to this instance (and not necessarily the tax table that was actually used when that lump sum was initially withdrawn).  This amount will then be deducted from the tax determined in the previous step.

Tax table applicable in the event of a withdrawal:

Tax table applicable in the event of retirement/death/retrenchment:

The fund value needs to be obtained from the specific fund administrator. Your eligibility to withdraw any lump sum from a fund will depend on:

• Legislative limitations
• The specified rules for the fund
• What type of fund it is
• Any previous withdrawals you’ve made
• Your age
• Your residency status while contributing to/withdrawing from the fund.

A withdrawal application must be submitted to the fund. After an assessment of your eligibility to receive the cash in the fund, the fund administrator will pay the after tax amount into a South African bank account.

This net amount can then be remitted offshore by any local bank using your foreign investment allowance.

FinGlobal gives an initial consultation, which is cost and obligation-free. A quote is given after we’ve conducted an assessment of your needs.

Our fees are fixed, transparent and always communicated upfront. We do not work on a commission-based system and you will only have to pay our fees upon successful completion of the service, and you can pay from your fund proceeds.