Product: pension fund or provident fund?
There is no right or wrong decision and there is no consistent choice by employers. We list the main factors influencing the choice between a pension and provident fund.
Pension Fund
The objective of a pension fund is to provide employees with a regular pension in retirement. Pension fund members must buy an annuity with at least two-thirds of their retirement fund.
Provident Fund
The objective of a provident fund is to provide employees with a lump sum benefit at retirement. A provident fund is thus more flexible, as employees can still purchase an annuity with their fund.
From 1 March 2016, the maximum permissible tax free deductible contributions to pension and provident funds have been standardised. Employers can deduct unlimited contributions to their employees’ pension or provident fund. These contributions attract fringe benefits tax that must be recovered from the employee. The employee can, in turn, deduct all contributions (employer and employee contributions) up at 27.5% of gross remuneration or taxable income (whichever is the higher), subject to an annual cap of R350,000.
More about starting a retirement fund
- Legal structure: umbrella or stand-alone?
- Product: Pension or provident fund?
- Who should be eligible to join? Membership criteria
- How much should you contribute? Contribution rates
- Should you attach risk benefits to the fund?
- Who does what? Service providers
- Governance: Board of Trustees and Principal Officer
- Specifics: Fund rules
- Should you offer investment choice?
- Should you offer a preservation fund option?
