In this article, we look at the basic concepts of Provident Funds.
A provident fund is a type of retirement fund, offered by an employer, governed by the Pension Funds Act Number 24 of 1956, as amended. The Act was most recently amended by the former Minister of Finance, Malusi Gigaba, and published in Gazette Number 41064 on 25 August 2017. Several key changes were made and it is advisable that you consult with a Certified Financial Planner to fully understand the most current legislation.
Additionally, the Taxation Laws Amendment Act of 2015 has passed some of the Government’s retirement reform proposals into law. The new rules are designed to harmonise the tax treatment for all types of retirement funds (i.e. pension, provident and retirement annuity funds). The new rules took effect on 1 March 2016.
Often there is confusion as to the differences between Pension Funds, Provident Funds or Retirement Annuities. In South Africa, all retirement funds are governed by the Pension Funds Act, but they are structured differently and serve different needs.
If you are a member of a provident fund, you can choose to take your entire retirement benefit as a lump sum. A portion of this may be tax-free, but you will be taxed on the portion which is not exempt from tax.
If you resign or are dismissed, you may transfer your provident fund benefit to a “preservation provident fund”. This is designed to safeguard your retirement savings. You won’t be taxed on the transfer of your savings and you are also allowed one withdrawal prior to retirement.
Provident fund members benefit from a larger tax deduction (in percentage terms) on contributions made to their provident fund. The effective increase is from 20% of pensionable income to 27.5% of gross remuneration or taxable income. Provident fund members who currently contribute to their fund will see an increase in their take-home pay as they will now receive a tax deduction on their contribution.
SARS has a wealth of information related to tax and retirement on link
This article is provided for information only and does not constitute the provision of professional advice of any kind.