What are the differences between a provident and a pension fund?

Historically, pension and provident funds had significant differences in how you could access your money at retirement. Today, these funds operate very similarly, especially under the current two-pot system. Let's explore what this means for you.

Current similarities

Both pension and provident funds now follow the two-pot system, which means your savings are divided into three components:

The Savings Component: With both fund types, you can make one withdrawal per tax year from this portion, with a minimum withdrawal of R2,000. These withdrawals are available even while you're employed, and they'll be taxed at your marginal rate—the same rate that applies to your salary.

The Retirement Component: This portion works identically for both fund types. It must remain invested until retirement, at which point you'll use it to purchase an annuity that provides regular income during your retirement years.

The Vested Component: This contains your pre-September 2024 savings, and it's here where we still see some important differences between pension and provident funds.

Key remaining differences

The main differences now relate to how your vested benefits (pre-September 2024 savings) are treated at retirement.

For Pension Funds: Your vested benefits follow what's known as the one-third/two-thirds rule. At retirement, you can take up to one-third of this portion as a cash lump sum, while at least two-thirds must be used to purchase an annuity for regular income.

For Provident Funds: The rules for your vested benefits depend on your age as of March 1, 2021. If you were 55 or older on that date and remain in the same fund, you can still take your full vested benefit as cash at retirement. However, if you were under 55, your vested benefits follow the same one-third/two-thirds rule as pension funds.

Other considerations

Both fund types now offer similar tax benefits and typically include employer contributions alongside your own. For both types, if your total retirement savings across all funds is less than R247,500, you can take the full amount as cash at retirement.

Planning for retirement

Whether you have a pension or provident fund, the focus is now on securing stable retirement income. The two-pot system provides some flexibility through the savings component while ensuring the retirement component is preserved for your future needs. This approach helps balance immediate access when needed with long-term financial security.

Our Two-Pot Calculator can help you understand how different withdrawal choices might affect your retirement savings.