Question:
I would like to know what the difference is between a provident fund, pension fund, preservation fund and retirement annuity fund.
Answer:
Hi Bruce,
All are retirement funds governed by the Pension Funds Act, but they serve different needs and purposes. Pension and provident funds are so-called workplace funds. If you become employed by a company that offers one of these funds, and you are eligible to join, then you must join this fund. It must be a condition of your employment.
The purpose of a pension fund is to pay you a pension in retirement. You must therefore convert at least two-thirds of your pension fund into an annuity that will pay you a regular income for the rest of your life. You can take the other one-third as a cash lump sum. Under present law, the employer may claim a 20% deduction iro your pensionable income and you may contribute and claim a further 7.5% of your pensionable income. The purpose of a provident fund is to pay you a cash lump sum at retirement (although you can also convert it to annuity if you wish).
A preservation fund enables you to preserve your pension fund or provident fund savings when you change jobs and don’t cash in your retirement savings. You cannot contribute to a preservation fund however at retirement.
A retirement annuity is a retirement fund for individuals who are self-employed, or whose employer does not offer a work place fund. Presently, you can claim a contribution of 27.5% of non-pensionable income for tax purposes. A retirement annuity is similar to a pension fund in that you must use at least two-thirds of the fund to purchase an annuity when you retire. Unlike a pension / provident / preservation fund, you cannot cash in a retirement annuity before retirement (minimum age 55).
If anything is unclear, speak to a consultant to talk through the different retirement products.
