Which is better: pension fund, retirement annuity or provident fund?

Published on 22nd January, 2020 at 10:13 am

When it comes to a tax-savvy retirement that meets your individual needs, finance experts suggest considering these questions before choosing a savings vehicle.

Who am I employed by?

The answer to this question will streamline your journey to selecting the right retirement savings vehicle for you, since it could largely be determined by factors beyond your control.

An organisation
If you’re employed by an organisation, you could be obliged to join their group provident or pension fund if you aren’t independently a member of another retirement savings scheme already. “Membership of a pension or provident fund is usually a condition of employment of many employers, and their primary purpose is to provide retirement benefits to employees when they retire,” explains Bennie Wessels, product actuary at Sanlam Savings. If you can prove your membership to a retirement annuity, this requirement can usually be waivered.

Are you moving jobs? Here’s why you shouldn’t touch your pension fund.

I’m self-employed
Retirement annuities are primarily designed to meet your needs, says Wessels. “However, anyone can contribute to a retirement annuity; even if you belong to your employer’s pension or provident fund, or if you’ve already retired.” They also typically offer a much wider investment fund choice than pension or provident funds, adds Wessels.

How accessible do I want my retirement savings to be?

You have the most freedom to access your funds with a provident fund: you can take all the proceeds as a lump sum when you cash out, and this can be before retirement. With a pension fund, you’re a bit more limited. “A maximum of one third of the proceeds of a pension fund can be paid out as a lump sum at retirement, and the rest must be used to provide you with an income in retirement,” explains Wessels. Retirement annuities have the same limitation, but are further restricting because you can’t cash out until age 55.

Which is a more cost-effective retirement option?

“Pension and provident funds are sometimes slightly more cost effective,” says Wessels. This is due to economy of scale, i.e. it’s more affordable for a company and its employees to join a group retirement scheme.
When it comes to risk protection, all products are limited in terms of the percentage of the savings that can be invested in higher risk assets such as equities and offshore investments, adds Wessels.

Which will offer a more tax-efficient retirement?

All retirement savings vehicles are subject to the same maximum tax deduction of 27.5% of total gross earnings. “This is subject to a ceiling of R350 000,” cautions Wessels. “From a tax efficiency point of view, they are therefore equally tax efficient,” he adds. Also note that the growth and income within all three options is tax-free – you’ll only pay tax when you withdraw the funds.
Find out how you can save tax with a retirement annuity here.

Struggling to decide on the right retirement savings option for you? A financial planner can help you plan for your retirement. Book a meeting now.