There are three types of retirement funds: two of these are the pension fund and the provident fund. Pension and Provident Funds are employer-based schemes because only an employer can initiate them. A retirement fund must be registered by the Financial Services Board and approved by the South African Revenue Services to obtain the necessary tax benefits provided to retirement funds. All these funds run under a trustee arrangement where the trustees manage the fund and take care of the interests of the members.
The pension fund receives contributions during a member’s employment and provides for the payment of a pension on retirement. The member may, however, commute up to a maximum of 1/3rd from the pension benefit as a lump sum and receive the balance of 2/3rd in the form of a pension. The member’s decision to commute or not, will depend on their personal circumstances and tax benefits available at the time of retirement.
A provident fund structure makes provision for the fund to receive contributions while the member is still in employment. On retirement the member is entitled to receive the full benefit available in the form of a lump sum. The member is not obliged to receive the full benefit as a lump sum, but is entitled to utilise a portion thereof to purchase a pension. This entitlement to utilise the pension option needs to be built into the rules of the fund. Apart from legislation and regulations governing pension and provident funds, the rules of each specific fund guide the members’ interaction with the fund.