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How does a retirement fund work in South Africa?

7 Oct 2022

You have different options for saving for retirement, including investing in a retirement fund. The best retirement funds can make a big difference in your financial future and your ability to fund your retirement.

The better your understanding of how retirement funds differ, the better you can plan and make informed decisions. 

There are four types of retirement funds:

  1. Pension fund
  2. Provident fund
  3. Preservation fund
  4. Retirement annuity (RA)

To differentiate between these, let’s look at some of their core features:

  • How you access the fund
    Pension and provident funds are provided by your employer and are not available to the public.  A Retirement Annuity is like a personal pension plan that is available to individual investors. When your employer offers you a pension fund or provident fund, it is normally compulsory to join, therefore, investing in one of these funds will be the starting point of your retirement savings. Should your employer not offer any retirement benefits, or you are self-employed, then you should invest in an RA.
  • Contributions
    Pension/Provident Fund are available to salaried employees from companies providing retirement benefits. Pension/Provident Fund is paid by your employer and helps you to save for retirement. When you withdraw from an IRA as an individual, you will be responsible for the full monthly contribution. You should give as much as you can within the limits below.
  • Choice of investments
    Pension and provident fund trustees decide on investment options and fund managers available to you. An annuity can be an attractive retirement option for many retirees. All pension funds must adhere to strict investment limits to assure that risk is limited.
  • Access to your money before retirement
    If you have a pension or provident fund, you can access your savings before retirement only if you leave your employer, ie if you resign or are retrenched or dismissed. It depends whether you want your savings to remain tax-exempt or if you want them to become taxable.  
  • Access to your money at retirement
    In order to take advantage of a tax-advantaged retirement plan or a retirement annuity, you need to make sure that you take at least two-thirds of the total investment amount at retirement. Depending on how much you make each month, you might be able to choose between a monthly repayment or taking one-third of the total amount as a cash lump sum tax-free.