Let’s face it, we are all going to have to retire one day and rather than sticking our head in the sand, it’s better to know your facts and be prepared. According to the National Treasury, only 6% of South Africans are on the right road to retiring comfortably which means that people need to start getting serious about saving towards their retirement sooner rather than later. A carefully considered retirement plan must consider all expenses, including the unplanned ones, to ensure that you are putting enough savings aside each month.

A commonly asked retirement-related question is:

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

In general, funds will have some sort of benefit, for example:

  • Withdrawal benefits: paid to workers who resign or are asked to leave
  • Retrenchment benefits: for retrenched people
  • Retirement benefits: for retired people
  • Insured benefits: paid to a worker who is disabled and to the dependent in the case of a worker dying

Whichever type of fund you choose is completely your choice but it’s important to make sure you have all the right information and get seek advice. We explain the difference between a Retirement Annuity and Provident Fund.

Retirement Annuity

A retirement annuity (RA) is a fund that you make monthly contributions to, usually via a debit order, and is independent of your employer. If you change jobs, it makes no difference to your RA and it will continue going. You also get to choose what funds you invest your money in. Upon retiring or reaching the age of 55, you will have access to one third of your RA as a lump sum of cash, which is taxable, and the balance must be used to purchase an income product or annuity. If the total interest in the fund is less than R247 500, then you can take the full amount as a cash lump sum. Note that the growth and income within your fund, while you are a member, is tax free but when you access your funds it will be taxed.

Provident Fund

The main purpose of a provident fund is to provide benefits for members when they retire and in the event of a death, sustained disability or illness of a member. It also differs in that you are able to withdraw your entire savings amount as a lump sum when you retire. Provident funds are like retirement funds that are run by the government, they are funded by both employer and employee and operate more like a savings account where the money will eventually run out. An advantage of a provident fund is that by getting a lump sum payment, you avoid any problems in getting a private pension into a bank account. However, a disadvantage to receiving a lump sum is that you are likely to spend it very quickly if you are not good at managing your money.

Note that government is intending to align the benefits of provident funds to those of retirement annuity funds, a legislation that still needs to be applied and has been postponed to March 2021. The result of this will be that you will only be able to withdraw one third of your provident fund savings as a lump sum upon retirement as with the retirement annuity.

If you have any further questions regarding provident funds or retirement funds, give us a call on 086 111 4803 or email us on clientservices@rpassurance.co.za

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