Retirement 101

Never underestimate the power of being clued up and learning the basics of retirement speak. These terms should get you off to a good start:

Provident Fund

If you are working for a company, you’ve probably heard of this one. It is a compulsory saving tool set up by your employer. There is a tax saving, as contributions are subtracted from your gross annual income before tax is calculated. At retirement, the fund’s benefits used to be fully available in cash once the tax has been paid. But since 1 March 2021, provident funds are treated the same as pension funds. However, your contributions to a provident fund before 1 March 2021 will be ring-fenced, and the old rules still apply to the ring-fenced portion.

Retirement Annuity

This is a retirement-saving vehicle largely used by self-employed individuals or those without a retirement fund option at work. There is a tax saving, as contributions are subtracted from your gross annual income before tax is calculated. You would need to inform your payroll administrator if you want to enjoy the tax relief via your salary. Otherwise, you would submit a tax certificate to SARS every year to prove your contributions and possibly get a tax refund once your tax return has been finalised.

At retirement, only a third of the capital can be taken as a lump sum, subject to tax.

The remaining two thirds must be used to purchase a compulsory annuity product such as an investment-linked living annuity or life annuity. Fund benefits can only be accessed at retirement (usually after the age of 55).

Preservation Fund

If you’re planning to change jobs, this is definitely one to remember. Preservation funds are literally meant to preserve capital. There are two types: a pension preservation fund and a provident preservation fund

If you belong to a pension fund: On resignation, you can transfer your funds to a preservation pension fund. No tax is paid when the money is transferred and the fund allows for a single withdrawal of your capital prior to retirement, subject to withdrawal tax. At retirement, a maximum of one third of your fund value can be taken as a cash lump sum, subject to retirement tax, while the remaining two thirds must be used to purchase an annuity.

If you belong to a provident fund: On resignation, you can transfer your funds to a provident preservation fund. No tax is paid when your money is transferred, and the fund allows for a single withdrawal of your capital sum prior to retirement, subject to withdrawal tax. At retirement, a maximum of one third of your capital can be taken as a cash lump sum, subject to retirement tax, while the remaining two thirds must be used to purchase an annuity.

Defined-benefit retirement fund

This is a traditional pension fund that considers, among other factors, the number of years you have been part of the fund and your salary at retirement, to define the benefits accrued. The advantages are that you don’t take on the investment risk, and you can calculate the exact amount you receive at retirement (that is a percentage of your final salary). But the downside is that your pension may not keep pace with inflation because increases in contributions and benefits are at the discretion of the fund’s trustees. There are not many of these funds around today because most companies have moved over to defined contribution funds over the past few decades.

Defined contribution retirement fund

Contributions to this fund are paid by the employer and the member (you) but, unlike a defined benefit retirement fund, the amount of money you receive on retirement is not guaranteed. You decide where the fund should invest your contributions – from a range of underlying investment funds that the fund trustees make available – and you take on the full investment risk. The provident fund, pension fund and retirement annuity mentioned earlier are all examples of defined contribution funds.