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.
There are advantages and disadvantages to getting all your benefits in a lump sum. One disadvantage is that you may spend a lump sum very quickly. Then there will be nothing left as pension for the rest of your life . Then you will have to apply for a state pension. But if you invest the lump sum wisely you should not have this problem.
An advantage of getting a lump sum payment is that you avoid all the problems in getting a private pension every month. Insurance companies and other pension funds will pay a private pension into a bank account if you have one, or else send a cheque to your home address, or to your old employer who will then pass on the payment. But if you have no bank account or live in a place where the postal system is very unreliable, you might have great difficulty receiving and cashing your pension cheque every month. A lump sum will help to avoid all these problems.
For workers who are not well paid, the amount of a monthly pension may be so small that it gives them no security anyway. People also sometimes feel suspicious about leaving their money with pension fund companies after they retire. They would rather have the money to look after themselves. A person who gets a lump sum may be able to put this towards buying a house or plot of land, while a person retiring to a rural area may use it to buy cows, goats, and so on.
The provident fund is usually more flexible than the pension fund. Part of the lump sum can be used to buy a private pension through a private pension company. The main advantage of a pension fund is that it is paid for life. The pension will be paid out until you die. This offers you security because a certain amount of money will be coming in every month. If you are not disciplined to deal with a large sum of money, then it is better to get the money paid out in small amounts every month.
Pension funds offer better tax benefits to the worker. A worker’s contributions to a pension fund are deductible for tax, while contributions to a provident fund are not. No tax is payable on a lump sum of R30 000 or less (at March 1998) paid out by a provident fund.Trade unions usually demand provident funds for their members. They feel that many pension funds are very old and have rules which don’t take into account the interests of workers. Most provident funds were established more recently and have rules which suit the interests of workers. But pension funds can have rules that are as good as any provident fund.
The strongest argument in favour of provident funds and the lump sum payment concerns the means test used to work out whether a person qualifies for a state old-age pension. Usually if a person receives a private pension, that person is disqualified from receiving a state old-age pension. If a person gets a lump sum payment then that person can also qualify for a state pension in some cases.
Source: http://www.labourguide.co.za/