What’s the difference between retirement products?

There are numerous savings products available to safeguard your financial future. Three of 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.

retirement products

How does a pension fund work?

So, how do pension funds work? When you join a new company, you usually have to join the company’s pension fund. Your employer contributes to the fund (usually every month) on your behalf and/or deducts contributions from your salary. At retirement, you have the option to 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 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 same requirements to purchase an annuity at retirement, except if provident 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 full 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 made a withdrawal from another retirement fund previously.) 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 in a retirement annuity, the investor owns the investment 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 making contributions 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 get a better understanding of what this means in practical terms.


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