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Different savings options for retirement

Pension fund, provident fund or retirement annuity. What are the different savings options for retirement, and which is right for you?

There are many things to think about when you consider retirement, like how much you can currently afford to invest and how long you have until you reach retirement age. There are several different savings options for retirement, each with their own advantages and disadvantages.

Pension fund vs provident fund vs retirement annuity

Whether you’ve saved your nest egg alone or had contributions from a company pension or provident fund, when you’re ready to access your pension pot, you have several choices. They are all governed by the Pension Funds Act, but they do serve different needs and purposes.

1. Company pension fund

A company pension fund is offered by your employer, and it’s usually mandatory to join when you start working there. The purpose of a pension fund is to pay you an income during your retirement years. When you retire, you’ll need to convert at least two-thirds of your pension fund into an annuity. The annuity will then pay you a regular income for the rest of your life. You can take the remaining one-third as a cash lump sum (up to R500 000, tax-free).

2. A provident fund

The strategy behind a provident fund is that it will pay you a cash lump sum at retirement. This makes a provident fund more flexible than a pension fund, as you can keep the lump sum or invest it into an annuity fund.

Having a lump sum can be an advantage if you’re good at investing and looking after your finances. On the other hand, if you struggle to stick to your monthly budget, having your entire life savings in your account might not be the best idea for you.

Also, keep in mind that should you retrieve your entire lump sum you could end up paying tax on it. Here is how tax will be calculated on the gross retirement fund lump sum:

Lump sum contribution Tax payable
0 – R500 000 0% of taxable income
R500 001 - R700 000 18% of taxable income above 500 000
R700 001 – R1 050 000 ​R36 000 + 27% of taxable income above R700 000
R1 050 001 and above R130 500 + 36% of taxable income above R1 050 000


3. Retirement annuity

A retirement annuity (RA) is a retirement fund that you can take out yourself. When opening this fund, you can claim a contribution of 15% of non-pensionable income from tax purposes. This means that you pay less tax when you contribute to an RA.

It’s similar to a pension fund in that you must invest two-thirds of the fund in an income-producing annuity, such as a living annuity. But unlike a pension or provident fund, you can’t cash in a retirement annuity before you’re at least 55 years old. Taxed at favourable amounts, this amount will be paid to you as a monthly income during your retirement years.

4. Additional investments

Over the years, you may also have taken out other Savings or Investment accounts to supplement your retirement savings. Your payment options depend solely on the type of account and investment term. Speak to your bank to find about more about your options.

Seek expert advice

Good retirement strategies can help you live well later in life. It’s worth speaking to a financial planner to ensure you make an informed decision that is right for you.

Next step

Go to our Financial Planning page to explore your retirement options, or head to the retirement section of the Community and use the comments field to chat to customers and consultants.