What's the difference between retirement products? 1

What’s the difference between retirement products?

Numerous savings products are available to safeguard your financial future. The most common are pension funds, provident funds, and retirement annuities. These products have specific benefits, such as tax incentives and, in the case of retirement annuities, the allowance of continued contributions even if you leave an employer.

How does a pension fund work?

So, how do pension funds work? When you join a new company, you usually enter the company’s pension fund. Your employer contributes to the fund (usually every month) on your behalf and deducts contributions from your salary. At retirement, you can access up to one-third of the benefit in a cash lump sum; the remaining two-thirds should be used to purchase an income annuity such as a living annuity or guaranteed life annuity.

How does a provident fund work?

A provident fund is now identical to a pension fund. Before 1 March 2021, it differed in that when you retired, you could take your full benefit as a cash lump sum.

Since 1 March 2021, benefits from new contributions made to provident funds are subject to the exact requirements to purchase an annuity at retirement, except if prudent fund members were 55 years of age or older on that date and are still members of the same provident fund(s). In this case, they can still withdraw the total amount as cash at retirement; however, the withdrawal would be subject to tax.

How does a retirement annuity work?

When you retire, you can withdraw up to one-third of the total amount as cash unless the total investment value is below R247 500, in which case the full benefit can be taken as a cash lump sum. At this point, the first R500 000 of a lump sum withdrawal is tax-free (provided you have not previously withdrawn from another retirement fund.) The balance of the fund value needs to be used to purchase an annuity at that time, which will provide you with a regular income, such as a living annuity or a guaranteed life annuity.

So, the primary differences between pension, provident funds, and retirement annuities are that the investor owns the investment in a retirement annuity, and membership is not related to their employment status. In other words, even if they leave their employer, the investment can continue, and they can keep contributing to grow the investment.

Conversely, members of their employer’s pension or provident fund typically cannot carry on contributing to the fund when they leave that employer.

Very important!

As mentioned above, the Taxation Laws Amendment Act executed changes to the legislation that governs provident, pension funds, and retirement annuities that came into effect on 1 March 2021. It’s best to speak to an independent financial adviser to understand what this means practically.


I am a writer, financial consultant, husband, father, and avid surfer. I am also a long-time entrepreneur, investor, and trader. For almost two decades, I have worked in the financial sector, and now I focus on making money through investing in stock trading.