Your retirement fund options explained

The new Two-Pot Retirement System has reshaped how South Africans access and preserve their savings, applying across all retirement funds. Whether you’re in a pension, provident, preservation fund, or retirement annuity, understanding how these vehicles work and the impact on your long-term financial security is essential.

Pension Funds

Pension funds are occupational retirement funds, typically offered as part of your conditions of employment, and, in most cases, membership is compulsory when you join a company.  Employees contribute monthly, and depending on the rules of the fund, employers may also contribute on your behalf. Members often have flexibility in choosing their contribution rate, subject to tax-deductible limits of up to 27.5% of taxable income, capped at R350 000 per year.

Each pension fund is governed by a board of trustees, which must act in members’ best interests and who are responsible for setting the fund’s investment strategy. Importantly, pension funds are governed by Regulation 28 of the Pension Funds Act, which allows for diversification but can also limit offshore exposure. When leaving employment, pension fund members can:

When leaving employment, members can:

• Preserve savings in the company’s default strategy until retirement.
• Transfer their savings tax-free to a preservation fund or retirement annuity.
• Withdraw funds, either partially or in full, subject to the retirement fund withdrawal tax tables.

At retirement, you may take up to one-third of your savings as a cash lump sum, taxed per retirement fund tables, while the balance must be used to purchase an annuity income for retirement. Note that if your fund is worth less than R247 500, you may withdraw the full amount.

Provident Funds

Provident funds are also occupational funds with tax treatment identical to pension funds, with the same allowable tax deductions. While also subject to Regulation 28 of the Pension Funds Act, the rules of provident funds have historically been different. Before 1 March 2021, provident fund members could withdraw 100% of their retirement savings as a lump sum. However, since the harmonisation of retirement rules, new contributions to provident funds fall under the same rules as pensions and retirement annuities. In this regard, note that:

• Vested rights: Savings accumulated before 1 March 2021, plus growth, may still be withdrawn in full.
• Members over 55 on 1 March 2021: If you were 55 or older and remained in the same fund, all future contributions retain the right to full withdrawal.
• Members under 55 on 1 March 2021: You effectively hold two ‘pots’ of savings, vested rights (pre-March 2021) and unvested rights (post-March 2021). Only the vested rights can be taken in full; unvested savings follow pension rules.

As with pension funds, if your total value at retirement is below R247 500, you may withdraw everything.

Preservation Funds

Preservation funds are designed for individuals leaving employment who wish to safeguard their retirement savings. Providing a tax-free vehicle to transfer your pension or provident fund savings without cashing them in, their features include:

• One pre-retirement withdrawal: You are permitted a single partial or full withdrawal before age 55, with the first R27 500 being tax-free, while the balance is taxed per the withdrawal tables.
• No further contributions: You cannot top up a preservation fund unless the money comes from another retirement fund.
• Regulated structure: Like pension and provident funds, preservation funds are regulated by Regulation 28 of the Pension Funds Act.

At retirement, the same rules apply: up to one-third may be commuted for cash (subject to tax), and the remainder must be used to purchase an annuity - making this vehicle valuable for ensuring continuity in your retirement planning and protecting savings earmarked for later life.

Retirement Annuities

For individuals who are self-employed, freelancers, or whose employers do not offer occupational funds, retirement annuities (RAs) provide an independent way to build retirement wealth. They are also attractive for those who want to save beyond their occupational fund. Like other retirement funds, contributions qualify for the 27.5% deduction capped at R350 000. While all investments must comply with Regulation 28 of the Act, RA investors have considerable freedom to select portfolios that are aligned with their goals, risk appetite, and investment horizon.

Over and above the access provided by the Savings Pot, the funds invested in a retirement annuity cannot be accessed before age 55, except in special cases such as emigration under old exchange control rules or permanent disability. On retirement, the same one-third/two-thirds rule applies. A key advantage of retirement annuities is the flexibility around retirement age. There is no upper age limit for retirement, which means that you can continue contributing towards your RA for as long as you like and only retire from the fund when you are ready to do so. 

As is evident from the above, each vehicle serves a purpose: pension and provident funds anchor workplace savings, preservation funds protect savings when you change jobs, while retirement annuities empower individuals to build wealth independently. Knowing how they work and the tax and withdrawal rules that apply will allow you to choose wisely, avoid unnecessary tax, and ensure that your retirement planning remains on track.

* Odendaal is an associate financial planner at Crue Invest.

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