One retirement, so many funds – pick the right one

Saving for retirement should be one of your priorities. However, it can be confusing to choose between a pension fund, provident fund, preservation fund, or a retirement annuity if you’re not familiar with them.

Justmoney spoke to Daniel van Andel, product development manager at Allan Gray, who has explained the differences.

Tip: See how much you need to retire comfortably by making use of our retirement calculator.

Pension and Provident Funds

Employers usually offer their employees some form of retirement savings scheme. Employers may contribute on employees’ behalf or deduct contributions from employees’ salaries.

Traditionally, employers have offered so-called “standalone” retirement funds of which there are two types: pension funds and provident funds.

These funds are called “standalone” funds because they are put in place by the employer and are only available to that specific employer’s employees.

The difference between a pension and provident fund relates to how you can access your money at retirement, says Van Andel.

In a pension fund, you can take up to one-third of your investment as cash when you retire. The remaining balance must be used to purchase a product that can provide you with an income in retirement, also called an annuity. This should not be confused with a retirement annuity.

However, if your balance in the fund is below R247,500, you can take the full amount in cash.

On the other hand, if you are invested in a provident fund, you can take the full investment as cash when you retire. However, if this is not necessary, you can still choose to invest in an annuity to provide you with a retirement income.

ALSO READ: How much money do you need to retire?

When you leave your employer, you are no longer allowed to be an active, contributing member of that employer’s pension or provident fund. You can either preserve your savings in the fund, withdraw it, or transfer it to another retirement product, or provider.

One of the products you can transfer your accumulated savings to is a preservation fund.

What is a preservation fund?

A preservation fund is a product that allows you to preserve your accumulated retirement savings when you leave a retirement fund – for example, your employer’s pension or provident fund.

Van Andel says that even though this allows your savings pot to continue growing, you are not allowed to make additional contributions to a preservation fund.

Depending on the type of retirement fund you’re transferring from, you will transfer to either a pension preservation fund or a provident preservation fund.

In a pension preservation fund, you can take up to one-third of your investment as cash when you retire. The remaining balance must be used to purchase a product that can provide you with an income in retirement – that is an annuity. Again, if your balance in the fund is below R247,500, you can take the full amount in cash.

If you are invested in a provident preservation fund, you can take the full investment as cash when you retire, but you can still choose to invest in an annuity to provide you with a retirement income.

Retirement annuities

A retirement annuity is a retirement savings vehicle that allows individuals to save for retirement independently. It does not rely on an employee-employer relationship.

Although the investor enjoys the same tax advantages as in a pension or provident fund, the investment is in their own name and is not linked to an employer.

According to Van Andel, the treatment of retirement annuities at retirement is the same as that of pension funds. You can take up to one-third of your investment as cash when you retire, and the balance must be used to purchase a product that can provide you with an income in retirement.  

However, if your balance in the fund is below R247,500, you can take the full amount in cash.

Which is the best option?

The type of retirement fund you end up with largely depends on how you are employed, says Van Andel.

Your employer may offer a pension fund or, if you’re self-employed, your only option would be a retirement annuity.

Can you have all of them at once?

Van Andel says it’s possible to have multiple types of retirement funds. For example, your first employer may have offered a pension fund, which you then transferred to a pension preservation fund when you left that employer.

Your new employer may offer a provident fund, of which you must be a member as a condition of your employment, but you may also decide to supplement your retirement savings by investing in a retirement annuity.

The returns you earn in any recognised retirement fund are tax-free while you remain invested. However, withdrawals before or at retirement are subject to tax if you withdraw more than the amounts determined by law.

Please note that pension fund legislation is likely to change from 1 March 2021 to bring the treatment of provident funds at retirement in line with that of pension funds.

Investing in retirement will help you continue living the life you’re living now. Get your retirement quote by clicking here.