It can be overwhelming processing all the information about pension funds available on the internet. How does one know whether to opt for a
Retirement Annuity, a Provident Fund, or a Pension Fund when saving for the twilight years? Gaining a better understanding of these funds is essential to make an informed decision about your financial needs when retiring.
In South Africa pension funds are governed by the Pensions Fund Act and the Income Tax Act, and although similar in many respects, there are differences which must be considered. All of them have the primary benefit of allowing people to save for their retirement while also giving them tax incentives which encourage them to continue paying into the fund until they retire.
A Retirement Annuity (RA) is an attractive option for those who are self-employed as it is independent of an employer and allows you to raise or lower contributions according to personal affordability. However, no withdrawal is allowed from this fund before the age of 55. At this time, you are only allowed to withdraw one third of the cash value, the other two thirds need to be reinvested in an annuity fund, which is taxable. If the benefit amount falls below a certain figure however, the full amount may be withdrawn. This can be moved forward by getting a loan against your retirement annuity.
Pension & Provident Funds
Pension and Provident Funds are based on an employer/employee relationship. Both parties make monthly contributions to the fund, and those made by the employer, are seen as the employee’s contribution, and are considered part of their taxable income. As with the RA, you may withdraw one third of the cash value at retirement and this lump sum is taxable. The remaining two thirds must be used to buy an annuity which pays out monthly and is also taxable. The earliest at which you can withdraw from your pension/provident fund is 55 years of age, however under certain circumstances one can request early pension release, but this will have certain tax implications.
Pension Bridging Loans (Retirement Loan)
The good news is that you can get a loan against your pension, a provident fund loan and you can borrow against your pension. If you require a cash advance following retirement, resignation, retrenchment, dismissal, or due to a divorce, it is possible to gain access to the funds via a bridging loan for pension payout. This is also possible if awaiting a pay-out after the death of a loved one, or if your pension fund, provident fund, or retirement annuity is maturing within four months. The minimum term for this cash loan is 65 days and the maximum term 90 days and is subject to bridging fees which can be discussed with the lender. Recent retirement reforms have now made these funds very similar. The common factor between retirement funds is that they all qualify you for a tax deduction of up to 27.5% of your taxable income (up to a maximum of R350 000 pr year), and they all encourage saving to ensure financial stability upon retirement. One thing remains
true, it is never too early to start saving for your golden years.