General

What is the difference between a provident, pension, RA and preservation fund?

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). 

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. 

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.

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