The main difference between a Pension fund and Provident fund is that if a pension fund member retires, the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member’s life. Whereas a provident fund member can get the full benefit paid in a cash lump sum.
Also with the provident fund it’s usually more flexible than the pension fund, where part of the lump sum can be used to buy a private pension through a private pension company. One disadvantage is that you may spend a lump sum very quickly. Then there will be nothing left as pension for the rest of your life. Then you’ll have to apply for a state pension. But if you invest the lump sum wisely you should not have this problem.
While the main advantage of a pension fund is that it’s paid for life. The pension will be paid out until you die. This offers you security because a certain amount of money will be coming in every month. If you’re not disciplined to deal with a large sum of money, then it’s better to get the money paid out in small amounts every month.
Pension funds also offer better tax benefits to the worker. A worker’s contributions to a pension fund are deductible for tax, while contributions to a provident fund aren’t. No tax is payable on a lump sum of R30 000 or less paid out by a provident fund. Pension funds can also have rules that are just as good as any provident fund.
But pension funds are deemed as very old and have rules which don’t take into account the interests of workers. Most provident funds were established more recently and have rules which suit the interests of workers.
The strongest argument in favour of provident funds and the lump sum payment concerns the means test used to work out whether a person qualifies for a state old-age pension. Usually if a person receives a private pension, that person is disqualified from receiving a state old-age pension. If a person gets a lump sum payment then that person can also qualify for a state pension in some cases.