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Difference between a pension and provident fund

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Since 1 March 2021, there are fewer differences between pension funds and provident funds and both are feasible solutions for saving for your retirement.


Planning for your retirement by joining a retirement fund is important. Many employers allow employees to join a pension or provident fund when they join the company. These are both retirement funds and differ only slightly.

Why saving for your retirement is important

It is important to consider what your financial situation will be once you retire, even if it seems far in the future or does not seem like a pressing issue now in your current day-to-day life. Saving for retirement early on is one of the only ways to ensure that you have enough income after retirement to maintain your lifestyle, even when you are not working.

There are also other reasons why saving and investing for your retirement is a good idea, like to cover unexpected expenses that may arise, to lessen the financial burden on your family, and for some of the tax benefits that you may receive from a pension or provident fund.

Difference between a pension and provident fund

Taking into account the importance of saving for your retirement, the South African government offers considerable tax benefits on retirement funds, such as pension funds and provident funds. However, this may also mean that you are fairly limited in terms of how much money you can withdraw from these funds.

When a company employs you, you can usually opt to join the company’s pension or provident fund. Although, it is important that you know how these funds work, so that you can plan adequately for your retirement.

Before 1 March 2021, members of a provident fund could withdraw their entire benefit as a lump sum when they retired, whereas members of a pension fund could only withdraw a third of their benefit. However, since the laws have changed, the differences between these two funds have become practically negligible.

What is a pension fund?

A pension fund can only be joined through an employer and is not available to the unemployed public. You and your employer will then make contributions towards this fund on a monthly basis, and it is managed by appointed trustees who decide on which assets to include in the fund and how to manage the money.

These contributions are tax-deductible up to a maximum of 27.5 percent of your taxable income, with a capped rand value of R350 000 per annum. When you retire, you may withdraw up to a third of your pension benefit as a lump sum, which is taxable. The remainder of your pension benefit must be used to secure your income annuity, which is a guaranteed stream of income that pays you monthly in your retirement, either for an agreed-upon number of years, or for the rest of your life.

What is a provident fund?

Since the pension reforms on 1 March 2021, a provident fund now works in much the same way as a pension fund. This means that upon retirement age, you are eligible to take out up to a third of your provident benefit as a lump sum, which is taxable, and the remaining two-thirds will need to be invested into an income annuity from which you will receive income monthly after your retirement.

The rules for provident funds depend on your age as of 1 March 2021 and are as follows after this pension reform:

  • 55 and older: no change and the full value of your provident fund may be paid out as a lump sum upon your retirement
  • Younger than 55: you will have two separate pots of savings, one with all of your provident benefits up to 1 March 2021 which will be accessible as a lump sum upon your retirement; and one that consists of all your contributions after 1 March 2021 which will act as a new provident fund with the one third available as a lump sum upon your retirement.

What are the benefits of a pension and provident fund?

Employers do not have to offer pension and provident fund benefits to employees, but if they do, you will be able to join these funds when you join the company. Some of the benefits of joining include:

  • This may mean less decision-making and admin than saving for your retirement on your own
  • Tax benefits apply to both pension and provident funds
  • They offer an affordable way to save money for your retirement

Final thoughts

It is important to ensure that you save for your retirement so that you can have enough income to maintain your pre-retirement lifestyle and live comfortably. Since the retirement reform, there is not much difference between a provident and pension fund and they both have many benefits.