Pension Funds

Pension and Provident Funds

The main aim from a pension or provident fund is to provide benefits for its members for when they retire from employment. The fund also usually pays benefits when a member dies while still working, or is unable to work because of illness, or is retrenched.

The difference between a Pension Fund and a Provident Fund.

The main difference is that if a pension fund member retires the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member’s life.  A provident fund member can get the full benefit paid in a cash lump sum.

How does a pension or provident fund work?

Money goes into a fund through contributions from employers and employees (sometimes only employers contribute to the fund). These funds gain interest when the insurance company’s invest them. Money goes out of the fund to pay for benefits and also for the expenses of running the fund.

Normally a fund has these kinds of benefits

• Withdrawal benefit – paid to workers who resign or are dismissed.
• Retrenchment benefit – paid to workers who are retrenched.
• Retirement benefit – paid to workers when they retire.
• Insured benefit – including benefits paid to a worker who is disabled and benefits paid to the dependents of a worker who dies.

Not all funds provide all these benefits. To understand how any fund works, the member must read the rules of the fund.

Taxation on Pension or Provident Fund benefits.

Retirement age is normally from 55.

Withdrawal or Retrenchment

R0 – R25 000

R25 001 – R660 000

R660 001 – R990 000

R990 001 and Above

Withdrawal or Retirement

0%

18% above R25 000

R114 300 + 27% above R660 000

R203 400 + 36% above R990 000

Retirement

R0 – R500 000

R500 001 – R700 000

R700 001 – R1 050 000

R1 050 001 and Above

Retirement

0%

18% above R500 000

R36 000 + 27% above R700 000

R130 000 + 36% above R1 050 000