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Pension funds, Provident funds & Retirement annuities explained

By September 22, 2022October 5th, 2022Newsletter

Pension funds, Provident funds & Retirement annuities explained

September 22, 2022


Saving for your retirement is one of the most important things you can do during your working career. Most people know about saving for retirement through pension funds, but there is more than one way to ensure that you provide for your income needs once you decide to stop working. In fact, there are so many options it can get a little overwhelming. That’s why we’ll be explaining the differences between pension funds, provident funds, preservation funds and retirement annuities – to help you make better decisions for your future.

Pension funds in South Africa

What is a pension fund?

A pension fund is a retirement fund into which you and your employer contribute on a monthly basis.

  • You can only join a pension fund through a company that employs you. Contributions made by you and your employer are tax deductible up to certain limits.
  • Your money is managed by trustees who decide on the fund’s investment strategy.
  • The growth and income within your fund, while you’re a member of the fund, is tax free. Tax is only payable when you access your funds.
  • At retirement, you can access up to one-third of your savings as cash, the rest must be used to purchase a living or life annuity to provide an income for your retirement.

What happens with my pension fund when I retire?

When you reach the age of 55, you become eligible to retire from the pension fund but you do not have to stop working. At this point, you may take up to a maximum of one third of your savings in a cash lump sum which is taxable.

  • The balance must be used to buy an annuity, and the income from this annuity is taxable.
  • However, if the amount in the fund is less than R247,500 you can take the full amount as a cash lump sum, subject to tax.

What happens to my pension if I leave a company before I retire?

If you resign or you are dismissed or retrenched, you will need to move your savings out of the company pension fund. At this point, you can move your money to –

  • your new company’s pension fund
  • a pension preservation fund
  • or a retirement annuity fund

You also get a withdrawal benefit at this point and you can take up to a third as a cash payout, subject to tax.

Can you withdraw from your South African pension fund?

South Africans are currently only able to withdraw or transfer their pension funds if they resign, retire or become unemployed. There are possible changes to pension fund rules that might allow pre-retirement withdrawal, but the impact of these changes is still speculative at this point.

Provident Funds in South Africa

A provident fund is now the same as a pension fund, but it wasn’t always this way. Before 1 March 2021, you could take the entire contents of your provident fund as a cash withdrawal (subject to tax) when you resigned or retired. Purchasing an annuity using your provident fund was not compulsory. Today, with reforms introduced to harmonise retirement savings vehicles, provident funds are more similar to pension funds, and the following applies:

  • Growth and income within your fund, while you are a member of the fund, is tax free. Tax is only payable when you access your funds.
  • Fund members can take one third of the benefit as a lump sum upon retirement or when moving companies.
  • The remaining funds must be used to purchase an annuity that provides a pension income.

What happens to my provident fund if I leave the company before I retire?

If you leave a company before you retire (due to retrenchment or resignation for example) you should move your savings out of the company fund. You can move your savings to:

  • Your new company’s provident fund
  • A provident preservation fund
  • A retirement annuity fund

While you can take a cash payout at this point, you must bear in mind that this lump sum withdrawal will be taxed.

What is a preservation fund?

This is a fund for retirement saving that is specifically designed to receive and hold (‘preserve”) lump sum benefits from a pension or provident fund when you resign or move companies before retirement.

  • While the funds remain in the preservation fund, your capital will continue to grow.
  • You can make one partial or full withdrawal from this fund before you reach age 55. After that, you may only access the balance of your savings after age 55.

What is a Retirement Annuity (RA) in South Africa?

Retirement annuities are savings vehicles that are not linked to employment. Your monthly contributions are tax deductible (they offset your tax liability, often resulting in a tax refund). RAs are ideal for entrepreneurs, business owners, freelancers, and independent contractors.

How does a retirement annuity work?

When you retire, at age 55 or older, you can take a maximum of one-third as a cash lump sum (which is taxable) from your retirement annuity. The balance must be used to purchase an income annuity (the income from this annuity is of course taxable).

  • If the total amount in the fund is less than R247,500 you can take the full amount as a cash lump sum, subject to tax.
  • You are not obliged to take a lump sum withdrawal, and you can use the entire amount to purchase an annuity.
  • Changing jobs does not impact your retirement annuity, as it has nothing to do with your employer.

What’s the difference between a life/living annuity and a retirement annuity?

  1. Retirement annuities are pre-retirement savings vehicles, while a life/living annuity is a post-retirement product that you purchase when you are ready to stop working. These products allow you to re-invest your money post-retirement and select the income you want to receive.
  2. A living/life annuity cannot be transferred overseas if you relocate, but you will be able to transfer the income derived therefrom overseas. A retirement annuity can be cashed in once you have completed tax emigration to become a non-resident and maintained this non-resident status for at least three years.

FinGlobal: retirement annuity encashment specialists

If you’re looking for assistance in moving your retirement annuity savings abroad, you’ve come to the right place. FinGlobal is ready to help you relocate your finances abroad, and will be there to handle everything for you,  every step of the way. From tax clearance to tax emigration, retirement annuity withdrawal, and international transfers, we offer South African expats a complete financial solution that is convenient and tax compliant.

Ready to hear how we can help you move your money safely and quickly out of South Africa? Leave us your contact details and we’ll be in touch!