Pension, Provident Fund and Retirement Annuity Explained

Your payslip shows a deduction for a pension or provident fund, you may have heard of RAs, and everyone is talking about the two-pot system. It is normal to be confused. Understanding the basics helps you make better decisions, especially when you change jobs or feel tempted to withdraw.

What is happening

Pension fund and provident fund. These are retirement funds usually set up by your employer. You and often your employer contribute each month. Historically, provident funds let you take everything in cash at retirement, while pension funds required most of it to buy a monthly income (an annuity). Since March 2021 the rules have largely been aligned for new contributions, with protection for older members.

Retirement annuity (RA). An RA is a retirement fund you take out yourself, often used by self-employed people or to top up an employer fund. You can usually only access it from age 55, with limited exceptions.

Preservation fund. When you leave a job, you can move your retirement savings into a preservation fund to keep them invested instead of cashing out.

The two-pot system. Since 1 September 2024, new contributions are split into two pots. About one-third goes into a savings pot, which you may withdraw from once a tax year, subject to a minimum amount, tax at your marginal rate and fees. About two-thirds goes into a retirement pot, which you cannot touch until retirement and must mostly be used to buy an income. Money saved before September 2024 sits in a vested pot and follows the old rules. A small starting amount was moved from the vested pot into the savings pot.

Tax relief applies to contributions within an annual limit.

Is this you?

• You are changing jobs or have been retrenched.
• You are thinking about a savings pot withdrawal.
• You do not know what kind of fund you belong to.
• You are self-employed with no retirement savings.
• You are nearing retirement and need to choose an annuity.

30-second self-check

Answer yes or no.

• Do you know whether you belong to a pension fund, provident fund or neither?
• Do you know the value of your savings pot and retirement pot?
• Have you received your latest benefit statement?
• Do you know how much tax you would pay on a savings pot withdrawal?
• Do you know what happens to your fund if you resign?
• Have you updated your beneficiary nomination form?

0-1 yes: You have little information about your retirement savings. Ask HR or your fund administrator for your statement this week.
2-3 yes: You know some of the picture. Fill in the gaps before making any decision.
4 or more yes: You understand your retirement savings well. Keep checking statements yearly and before any withdrawal.

What you can do next

• Today: Ask HR which fund you belong to and request your latest benefit statement.
• This week: Find out your savings pot balance and what a withdrawal would cost you in tax and fees.
• This month: Before any withdrawal or resignation, compare the long-term cost with an FSCA-authorised planner.
• Use a savings pot withdrawal only for a true emergency. Money you take now will not grow for your retirement.

Your tool

Retirement Product Guide - answer a few questions to see which fund type you have, how the two pots work for you, and what a withdrawal or resignation would mean.

When to get professional help

Speak to an FSCA-authorised planner before resigning, cashing out, choosing an annuity or making a savings pot withdrawal. If money pressure is making you feel you must withdraw, a counsellor or money coach can help you look at other options first.
Who can help: FSCA-authorised financial planner, tax practitioner, money coach

Getting help in South Africa

SARS (sars.gov.za) explains tax on retirement fund withdrawals and the two-pot system. The Financial Sector Conduct Authority (fsca.co.za) regulates retirement funds. The Pension Funds Adjudicator (pfa.org.za) handles complaints about funds, including late or missing payments. Your HR department and fund administrator can explain your fund rules.