What is the difference between a pension fund and a provident fund?

What is a provident fund?

A provident fund is a tax-efficient, long-term retirement savings investment vehicle that is voluntarily established by employers for their employees.

Employees and/or employers may contribute up to 27.5% of monthly salary towards retirement fund savings, capped at an annual limit of R350,000. Also, growth and income within your fund, while you are a member of the fund, are tax-free. Tax is only payable when you access your funds.

What is the difference between a pension fund and a provident fund?

A provident fund is now the same as a pension fund, but it wasn’t always this way. Before 1 March 2021, you could take the entire value of your provident fund as a cash withdrawal (subject to tax) when you left the fund for any reason. In a pension fund, you could only access the full value in cash if you left employment before retirement.

With the changes made on 1 March 2021, provident funds and pension funds now work exactly the same: at retirement, you have to use at least two-thirds of your savings value to buy a post-retirement income. The balance (up to one-third of your value) can be taken as a cash lump sum, subject to taxation.

If your total retirement value in the fund is less than R247 500, you can take the full amount as a cash lump sum, subject to tax.

What happens to my provident fund if I leave the company before I retire?

If you leave your employer before you retire, for example when you resign or are retrenched, you have the following options:

• Transfer your savings to your new company’s fund;
• Transfer your savings to a preservation fund;
• Transfer your savings to a retirement annuity fund;
• Receive your full savings value as a cash payment (subject to taxation); or
• Transfer a portion of your savings in one of the three manners described above and receive the balance as a cash payment (subject to taxation).