What Is A Provident Fund?
A provident fund is a retirement fund run by the government. They are generally compulsory, often through taxes, and are funded by both employer and employee contributions. Governments set the rules regarding withdrawals, including minimum age and withdrawal amount. If a participant dies, his or her surviving spouse and dependents may be able to continue drawing payments.
Unlike the U.S. Social Security system, workers in provident funds often only pay into their own retirement account, rather than a group account, so in this sense, a provident fund is similar to a 401(k) account. One key difference, though, is that in a 401(k) account, the account holder makes the investment decisions, while in a provident fund, the government makes the investment decisions.
What’s The Difference Between A Pension And A Provident Fund?
A pension fund is a retirement fund that receives frequent contributions (usually monthly) from you and your employer. At retirement, you can access up to one third of the benefit in cash, and the remaining two thirds must be used to purchase an income annuity.
A provident fund is the same as a pension fund, but prior to 1 March 2021, it differed in that when you resigned or retired, you could take the entire sum as cash, which you’d be taxed on. You wouldn’t need to purchase an annuity. With the retirement reforms introduced from 1 March 2021, provident funds are now more similar to pension funds, and the following now applies:
- Fund members are required to take a third of the benefit as a lump sum.
- They must use the remaining two thirds to buy a pension that provides a monthly income.
What Happens To My Provident Fund If I Leave The Company Before I Retire?
If you leave a company before you retire, for example when you resign or are retrenched, you may have to move your retirement savings out of the company fund. You can move your savings either to your new company’s fund, a preservation fund, or to a retirement annuity fund.
You can take a cash payout, but you should be aware that this cash payout will be subject to tax. The growth and income within your fund while you are a member of the fund is tax free. Tax is only payable when you access your funds as discussed above.
What Is A Provident Fund In South Africa?
A provident fund is an investment fund that is voluntarily established by Employer and employees to serve as long term savings to support an employee’s retirement. Sources of fund: Employee’s contribution: The amount deducted from the employee’s salary at a rate of 2% – 15%.The minimum percentage is 5.25%. You can see this deduction on your payslip. In addition your employer also contributes 5.25% of your wages to the Fund every month. All your own contributions are allocated towards your retirement savings.
Provided your tax affairs are in order, and you have submitted all the required documents (such as a copy of your ID, a completed instruction form stating where the money should go, and proof of banking details), it normally takes 14 to 21 business days to receive your provident fund pay-out.
