Question:

I am working for a company that uses 2 options for retirement saving: Option 1: provident fund (7.5 % employer contribution and 7.5% employee contribution) Option 2 pension fund and pension provident fund (7.5 % employer contribution and 7.5% employee contribution) What is the best option for the employee, and can one transfer funds from a provident fund to a pension fund when changing employment?

Answer:

The two big differences between a pension and a provident fund relate to 1. the tax treatment of contributions and 2. the annuitisation requirement at retirement.

Under current law, only the employer can claim a tax deduction for provident fund contributions. If employees contribute in their own name (ie not by way of a salary sacrifice), then this money is returned back to them tax-free at retirement (added to the tax-free cash lump sum). With a pension fund, both the employer (up to 20%) and the employee (up to 7.5%) can claim their contributions for tax. The provident fund arrangement is probably more suitable for lower income earners, who do not benefit from the tax deduction as their income is below the tax threshold. As an offset, a provident offers them more flexibility on retirement. Pension fund members must buy an annuity with at least two-thirds of their retirement benefit whereas provident fund members can take the full benefit as cash. Which is the preferred option depends on the employee's individual circumstances, and what they intend to do at retirement with their savings. To the extent that most people should not be entrusted with a cash lump sum at retirement (because they will likely then outlive their savings), the pension fund option is the more prudent one.

In terms of the proposed retirement reform, which may come into effect by 2015, the tax treatment and annuitisation requirements of provident funds will align with that of pension funds. Although vested rights will be protected, for younger savers, the question "pension or provident fund?" will then become irrelevant.

You can transfer your savings tax-free from a provident fund to a pension fund on changing jobs, but you cannot transfer from a pension to a provident fund.