Your Essential, 101 Guide to Pension & Provident Funds

What is a pension or provident fund? It’s a compulsory employer fund, where your Employer, or you, or both your Employer and yourself contribute towards a fund. 

Your pension or provident fund would have two parts:

  1. Retirement - Main aim of any fund - to ensure you build enough money for retirement.
  2. Insurance benefits - you get death benefits, disability benefits, spouses cover, dread disease/critical illness benefit, education benefits and many more.

Everyone struggles with how pension and provident funds work, and wants to understand why they need to belong to such a pension or provident fund. It’s a different animal, however, if understood and used correctly, it forms a vital spear in your arsenal as my son will attest - crazy about Spartans. Eye roll.

What is the difference between a pension and provident fund?

The main difference between a pension and provident fund is the amount of cash that a person can take on retirement.

A pension fund - you are able to take 1/3rd in cash (tax is payable on any cash taken) and 2/3rds must be used to buy you an income (annuity) for old age.

A provident fund - you are able to take the full amount in cash (again, yes tax is payable on any cash taken).

If you were in a provident fund prior to 1 March 2021, please read the Annuitisation of Provident Fund article, to understand how these monies will be dealt with at retirement in future.

How does my fund contribution work?

This is the most basic breakdown, but I encourage you to check your payslip and ask questions. Understand what you get out of your Cost to Company, including your Fund.

Generally, you would receive a salary based on Cost to Company, which includes a contribution towards your Employers’ pension or provident fund.

The administrator receives the contribution, they pay the insurance benefits, they pay the administration fee, they pay the benefit consultant and the asset manager. Other fees that need to be paid include governance fees - and yes, I’ll share my thoughts in another article on fees for our BankerX community. I got you.

And the contribution that remains is invested on your behalf.

How does the investments work?

Your investment choices are very similar to what you find in your personal capacity - however funds can allow choice or not.

Pension and provident funds are constrained by Regulation 28 of the Pension Funds Act. Regulation 28 restricts how these retirement monies are invested, including that they aren’t allowed to invest more than 30% of a portfolio offshore. The asset managers are used to it, they work with it daily, and take a deep breath. Industry is engaging with the Government on this - we'll let you know when we hear something. 

All funds provide a default investment strategy to their members. If you aren’t investment savvy, use the default. It is an investment strategy designed with the Board of Trustees, and expert asset managers to provide members with the best possible outcome.

How do I get my hands on my pension or provident funds monies?

Just off the bat, you shouldn’t! Leave it alone until you retire! Biggest problem in Employee Benefits  is what is called a leakage, or a member like yourself taking their monies in cash when they leave the Fund. 

Can you be stopped? No! But you need to break the relationship with your Employer. Meaning, one of the following events happen:

  • You resign
  • You are retrenched
  • You are dismissed.

If one of the above events takes place, you withdraw from a pension or provident fund. Before the monies hits your  back pocket, rather do one of the following:

  • Remain in your current Employer’s fund - defer your benefit
  • Transfer to your new Employer
  • Transfer to a Preservation Fund
  • Transfer to a Retirement Annuity Fund

All the excellent choices above would result in you not paying tax. However, if you like paying the taxman, then take cash, pay your pound of flesh as shown below in the Withdrawal Tax Table:

The other way of exiting a fund is either by retirement or death. In both cases, the below Retirement Tax Table is used to calculate the piece of the pie to the taxman:

Just think, R25 000 tax free amount versus R500 000 tax free. Which one would you choose?

Here’s some final thoughts on Pensions 101, understanding your pension Fund:

Your fund will never give you a 100% of your living lifestyle after retirement. If you have been diligent in the face of taking money and manage to continuously save throughout your working career, in your pension or provident fund, you will be lucky to get between 60%-70% of your salary at retirement.

Therefore educate yourself and look for wealth outside of your Fund. Don’t just rely on your fund. Again, think emergency fund, think savings with after tax monies, that won’t cost you by having to pay the taxman - puke! EFT’s, shares, the world is your oyster. 

BUT GET THE BASICS IN PLACE FIRST! Build your foundation, then learn to accumulate more wealth. Knowledge is very powerful and with the BankerX community, help is around the corner. Check you back here later for some hacks, on the flip-side.



How do you feel after reading this?