Pension and provident fund – which is right for you?

provident or pension fund

Pension and provident fund – which is right for you?

If you are a director or employee of a company, chances are that you belong to either a provident or pension fund. Even though this makes up the bulk of most people’s retirement provisions, few people know the difference between the two.

The purpose of both provident and pension funds is to provide employees or their dependants with an income upon retirement.

What are provident and pension funds?

Provident and pension funds are the investment vehicles that allow you to accumulate assets for your retirement through monthly contributions. These investment vehicles have their own sets of rules with regard to when and how you can access your capital. The rules are based on certain events, namely resignation, dismissal, retrenchment or retirement. SARS also treats these vehicles differently depending on which of the above events has occurred.

How does a provident or pension fund work?

The assets that accumulate within the provident or pension fund are invested into underlying investment fund/s. These investment funds will ultimately determine how well your provident or pension funds perform over time.So it’s critical to ensure that your underlying mix of investment funds is appropriately aligned to your overall investment goals. Certain funds allow you to choose how your contributions are invested. If your fund offers you a choice, consult your financial planner to ensure you that you choose the correct mix.

The interest within your provident or pension fund is protected against insolvency and creditors.

All dividends, interest and capital growth are not taxed within a provident or pension fund.

Provident and pension funds need to comply with regulation 28 of the Pension Fund Act. This Act directs the manager in which provident and pensions funds can invest in particular assets. The main purpose behind this legislation is to protect your investment interests from poorly devised investment portfolios.

What are the differences between the two types of funds?

The main difference between these retirement funds is how you receive your fund benefit at retirement.

As a member of a pension fund, you may elect to receive up to a third of your retirement benefit as a cash lump sum, with the remaining two-thirds being paid monthly. This monthly income will be taxed at your average rate of taxation in retirement. If no cash lump sum is taken, your full benefit will be paid monthly, resulting in a higher pension.

As a member of a provident fund, you can choose to take your entire retirement benefit as a lump sum. A portion of this may be tax-free, but you will be taxed on the portion that is not exempt.

Few individuals remain with the same employer for the whole of their working lives. If you resign or are dismissed, you may transfer your provident fund benefit to a ‘preservation provident fund’ and your pension fund to a ‘preservation pension fund’. These vehicles are specifically designed to safeguard your retirement savings.

You won’t be taxed on the transfer of your savings to one of these vehicles, and you are also allowed one withdrawal prior to retirement.

You also have the option to withdraw all the cash when leaving a company before retirement. However, this lump sum will be taxed (except the first R25,000, which is tax-free).

Resist the temptation to spend this money on something like holidays as you will more than likely need to fund your income later in life when you can no longer earn a regular salary.

Tax benefits of using a provident or pension fund

A member of a pension or provident fund may receive a tax deduction of up to a maximum of 27.5% of their taxable income with a capped rand value of R350,000 per annum. For example, if you earned R500,000 per annum, you would be allowed to contribute R137,500 towards your pension or provident fund and receive a tax deduction on this income. This would result in a tax saving of approximately R53,600 as per the 2019/20 tax tables.

More to consider about the funds

Another consideration to be aware of is whether your pension or provident fund offers death or disability cover. In the event of your death, the retirement fund will pay your beneficiaries all the contributions you have made to your retirement fund plus the growth on your investments and the group life assurance amount.

You should also consider whether you are a member of an approved or unapproved pension or provident fund. An approved fund has trustees that will apply their minds to your beneficiary nomination to ensure that your funds are going to your dependants, whereas with as unapproved fund your beneficiary nomination is seen as your final wish and will be followed without trustee approval. If you are a member of an unapproved fund, your beneficiaries will receive a tax-free payout on your death. However, if you are a member of an approved fund, your beneficiaries will not receive a tax-free payout.

You are able to nominate a beneficiary on your provident or pension fund, and it is recommended that you do this. Your human resources manager should be able to provide you with a beneficiary nomination form at your request.

My advice is to engage an independent, fee-based, accredited financial planner who is focused on your best interests and who looks at your retirement savings as part of your overall financial plan. Visit the Financial Planning Institute website,, to select a CERTIFIED FINANCIAL PLANNER®.


(Revised 2020 by Jonathan Botha CFP®. This article first appeared in The Weekender/Business Day on 2–3 Dec 2006.)

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