What is the difference between a provident, pension, RA and preservation fund?

While all these options are retirement funds governed by the Pension Funds Act, each serves a different purpose in your retirement planning journey. Under the current two-pot system (implemented September 2024), all these funds follow similar rules for withdrawals and preservation, but maintain some key differences in how they work.

Workplace Retirement Funds

Pension and Provident Funds are typically offered through employers. If your employer provides one of these funds and you're eligible, it becomes part of your employment package. Your employer often contributes alongside you, helping your retirement savings to grow faster.

Since March 2021, pension and provident funds have followed similar rules at retirement. For both funds, you'll need to use at least two-thirds of your retirement component to purchase an annuity that provides regular income in retirement. You can take up to one-third as a cash lump sum.

The main exception is for provident fund members who were 55 or older on March 1, 2021, and remain in the same fund. These members can still take their full vested benefit as a cash lump sum at retirement.

When You Change Jobs

This is where Preservation Funds come in. When you leave your employer, a preservation fund allows you to maintain your retirement savings without losing tax benefits. While you can't make additional contributions to a preservation fund, your money continues to grow tax-efficiently until retirement.

A preservation fund maintains the character of its source fund (pension or provident) but follows the same two-pot system rules as other retirement funds. You can make one withdrawal per tax year from the savings component, while the retirement component stays invested until retirement.

For Individual Retirement Saving

Retirement Annuities (RAs) serve those who are self-employed or want to supplement their workplace retirement savings. RAs offer similar tax benefits to workplace funds but with some key differences:

The retirement component of an RA must stay invested until at least age 55, whereas workplace funds might allow earlier access if you leave your job. However, under the two-pot system, you can now make one withdrawal per tax year from the savings component of your RA, even while employed.

At Retirement

Regardless of which fund type you have, at retirement you'll need to make decisions about how to receive your money:

Your retirement component must be used to purchase an annuity. You have two main choices:

• A life annuity provides guaranteed income for life, based on the prevailing interest rates
• A living annuity lets you invest your savings and draw a flexible income within regulated limits

Your savings component offers more flexibility - you can take it as cash (subject to tax) or use it to enhance your retirement income through an annuity.

Understanding Your Options

Each type of fund serves specific needs:

• Workplace funds (Pension/Provident) for employed individuals
• Preservation funds when changing jobs
• RAs for self-employed individuals or additional retirement saving

All these funds now operate under the two-pot system, allowing some access to savings while preserving core retirement benefits.