Provident Funds and Pension Funds are both retirement funds offered by employers to employees. The purpose of both is to provide an income for a member on retirement or an income for their dependents if the member dies. These funds can only be set up for groups of employees and therefore cannot be set up in a personal capacity. A retirement annuity on the other hand can be taken out in a personal capacity.
The fundamental difference between a provident fund and a pension fund is how members receive their fund benefits on retirement. In the case of a provident fund, members can choose to take the entire benefit as a cash lump sum. A portion of this may be tax-free but they will be taxed on the portion which is not exempt from tax. However, the provident fund rules of your employer could limit your choice on retirement. By way of example: Mr Brown’s employer provident fund rules stipulate that he has to retire from the fund at age 60, even though he has accepted an offer to continue working for the same company as a contractor. Mr Brown is not allowed to transfer his full provident fund value to a preservation provident plan until he finally retires. The rules have forced him to transfer to an annuity that will pay him an annuity income, pushing him into a higher tax bracket due to the extra income.
Members of a pension fund can choose to receive up to a third of the benefit as a cash lump sum on retirement and the remaining two-thirds of the benefit is paid out in the form of an annuity income. It is also worth knowing any specific pension fund rules that may limit your options on retirement.
Provident and pension fund members may purchase a conventional annuity or a living annuity for their full pension or the two-thirds that must be transferred to an annuity. The differences between conventional and living annuities don’t form part of this article.
The retirement tax tables have been amended in 2014. Previously R315,000 was tax-free, but the new limit as per the scale below is R500,000. Previous withdrawals and lump sums could impact the tax calculations.
Current draft legislation refers to various amendments in terms of retirement benefits and withdrawals, including but not limited to the tax situation prior to retirement. At this stage the accessibility of the full provident fund value at retirement will no longer be possible, once the final Bill has been passed. The aim is to apply the same one-third maximum cash portion rule to all retirement products and preserve retirement money. We welcome simpler and more equitable rules applicable to various retirement products in future.
If you are nearing retirement and wish to discuss your personal circumstances, please contact Loren le Roux at Personal Trust on 021 689 8975 or firstname.lastname@example.org.