Pension Funds & Provident Funds

Pension Fund

Pension funds enable employees and employers to contribute to a retirement fund which, once an employee retires, will pay the employee a monthly / quarterly / annual income which is based on the total amount contributed to the fund.

A pension fund is linked to your employment which means that you can only join a pension fund through your employer. A pension fund is managed by experts who decide which assets to invest in (subject to the applicable regulations).

Contributions to a pension fund are tax deductible for the employee and employer, but this is subject to certain maximum limits which we will discuss in the topic on the taxation of retirement funds.

When you retire at age 55 or above, you are entitled to receive up to one third or R247 500 (whichever is greater) of your total pension fund savings in a cash lump sum, which is taxable at specified rates (which we look at in the next topic). The amount that you do not withdraw as a lump sum (i.e. the balance of your pension fund savings) is used to purchase an annuity, which pays you a set monthly, quarterly or annual income until your death. The income received on your annuity is taxable as per the applicable income tax rates at the time.

If you leave your employer before you retire (either by resigning or if your employment is terminated for another reason) you may move your pension fund savings, tax free, from your employer’s fund to either:

  • your new employer’s pension fund
  • a preservation fund; or
  • a retirement annuity

You are entitled to withdraw up to a third of your pension fund savings when you leave your employer, this withdrawal will be subject to tax, which we will discuss in the topic on taxation of retirement funds.

Provident Fund

A provident fund is very similar to a pension fund and after the most recent amendments to the taxation of retirement funds, there is not much difference between the two.

Like a pension fund, a provident fund is linked to your employment and therefore can only be joined through your employer. A provident fund is merely a different type of pension fund which, for instance, is set up by a large company for its own employees.

Broadly, the same rules as discussed above for pension funds apply to provident funds. The only difference with a provident fund is that you are able to withdraw up to 100% of the amounts invested in your provident fund prior to 1 March 2021, when the new amendments to the pension fund legislation came into effect.