While all of these are retirement funds governed by the Pension Funds Act, they serve different purposes and have distinct characteristics.
Pension and Provident Funds
These are workplace funds offered by employers. If your employer provides one and you're eligible, you must join as a condition of employment.
As of March 1, 2021, the differences between pension and provident funds have narrowed due to legislative changes. Both now require members to annuitise at least two-thirds of their retirement benefit for contributions made after this date. This is typically done through a life or living annuity, providing a regular income in retirement. One-third can be taken as a cash lump sum.
A life annuity provides a guaranteed income for life, while a living annuity allows you to invest your savings and draw a flexible income, subject to certain limits.
However, provident fund members aged 55 or older on March 1, 2021 will still be able to take their full benefit as a cash lump sum at retirement if they remain in the same fund.
Changing jobs: Preservation Funds
A preservation fund allows you to preserve your pension or provident fund savings when changing jobs, instead of cashing them out. This helps maintain the tax-advantaged status of your retirement savings. However, you cannot make further contributions to a preservation fund.
Preservation funds are now also subject to the annuitisation requirements for savings transferred after March 1, 2021, aligning them more closely with pension and provident funds.
If you're changing employers, consider a Preservation Fund to keep your retirement savings on track.
Retirement Annuities (RAs)
RAs are individual retirement funds for the self-employed or those whose employers don't offer a workplace fund. They function similarly to pension funds, requiring at least two-thirds to be annuitised at retirement, usually through a life or living annuity.
A key difference is that the majority of your RA balance cannot be accessed before retirement age (minimum 55), whereas pension, provident and preservation funds have more provisions for early withdrawals, subject to tax implications. However, this is generally not advised as it diminishes your retirement savings.
To learn more about withdrawals under the two-pot regulations (in effect as of September 2024), read more here.
If you don't have access to an employer fund, a Retirement Annuity can be an excellent vehicle to save for retirement.
Retiring: Living Annuities
When deciding how to manage your retirement savings at retirement, consider factors like your income needs, other sources of income, risk tolerance, and legacy goals. A Living Annuity can provide a flexible and cost-effective solution for many retirees.
As always, speak to a financial professional to understand how these rules and options apply to your specific situation and retirement planning needs.
