From day-to-day we all hear about pension funds and provident funds however, do we really know what these are and what the underlying fundamental differences are between them so that when deciding upon a retirement fund which one should be taken out?

A pension fund will pay out a fixed amount per month upon retirement at the respective age (65 in South Africa) until death. A pension fund works in a way in which a small percentage of one’s net salary is paid into a collective fund and that individual will pay up to the retirement date.  Upon transferring between different companies along one’s life so too can pension funds be transferred.  Upon redemption a maximum of 33.3% can be taken as a lump sum of cash and a minimum of 66.65 will be paid as pensions.

A provident fund is very similar to a pension fund in that monthly payments are paid to a collective fund. The main things that separate the two are: the full amount of the provident fund can be redeemed as cash upon retirement, part of the provident fund is redeemable when one is in between jobs and upon disease or disability a provident fund will immediately start paying out and in the event of an early death the fund will pay out to the stipulated beneficiaries in the provident fund document, and if none are stipulated it will form part of the estate of the deceased and can be used to settle creditors in the event of sequestration of one’s estate.

To conclude it is in everyone’s best interest to hold both a pension fund and a provident fund for optimal retirement security as well as further tax advantages (will be discussed in later articles) due to the deductions for payments to such funds and to protect the connected persons in relation to yourself.