Saving for retirement is a crucial part of financial planning. The ultimate aim is to connect your financial decisions to the life you are planning for. Having a retirement plan suited to your specific needs can help give you peace of mind that you will be able to lead the life you want in your golden years.

There are different ways to save for retirement, including investing in a retirement fund. But how do these retirement funds compare and how should you use them for the best results?

Understanding how retirement funds differ can help you plan better and make informed decisions. 

There are four types of retirement funds:
 

1. A pension fund
2. A provident fund
3. A preservation fund
4. A retirement annuity (RA)

To understand how these differ, let's look at some of their key features:
 

• How you access the fund
  Pension and provident funds are offered by your employer – they are not available to the public.  An RA, on the other hand, is like a personal pension plan and is available to individual investors. If your employer offers a pension or provident fund, it is usually compulsory to join, so investing in one of these funds will automatically be the starting point for your retirement savings. If your employer does not offer any retirement benefits, or if you are self-employed, you should invest in an RA.
  
  
• Contributions
  Since you access a pension or provident fund via your employer, the monthly contribution will mostly be split between you and your employer, with your employer contributing a certain percentage of the monthly premium on your behalf. Since you take out an RA in your individual capacity, you will be responsible for the full monthly contribution. You should contribute as early as possible, and as much as possible according to the limits below.
  
  
• Tax-efficiency
  All retirement funds provide a tax-efficient way of saving for retirement. Firstly, your contributions towards the fund are tax-deductible, limited to 27,5% of your taxable income or gross remuneration (whichever is higher) during a tax year, subject to a cap of R350 000. This means you pay less income tax if you are making monthly contributions to a retirement fund. Secondly, the returns on your retirement fund savings are not subject to any interest and dividend income or capital gains taxes.
  
  
• Choice of investments
  With a pension and provident fund, the fund trustees will decide on the investment choices and asset managers available to you. With a retirement annuity however, you have more asset managers to choose from. All pension funds are however subject to more cautious investment limits to ensure that risk is managed appropriately.
  
  
• Access to your money before retirement
  With a pension or provident fund, you can access your savings before retirement only if you leave your employer, ie if you resign or are retrenched or dismissed. In that case you can transfer your savings tax-free to your new company’s pension fund, to a preservation fund or a retirement annuity, or you can take the full amount as a cash lump sum, which will be taxable. With an RA, you are generally not allowed to access your savings before age 55, with the following exceptions:
  • The total balance of your RA is less than R15 000.
  • You must retire early due to ill health or permanent disability.
  • You have been a non-resident for tax purposes for an uninterrupted period of three years, according to the relevant South African Revenue Service (SARS) process and criteria.
     
• Access to your money at retirement
  If you have a pension fund or RA, you must use at least two-thirds of the total investment amount at retirement to invest in an annuity, which will pay you a regular income during your retirement. You have the option to take one-third of the total amount as a cash lump sum tax-free (up to certain limits).
  
  
• What happens to your savings if you pass away before you retire?
  You can nominate beneficiaries on any of the types of retirement funds. But while the fund trustees will take your wishes into account, there is no guarantee that your beneficiaries will receive the benefit you allocated to them. This is because the trustees have a legal responsibility in terms of section 37C of the Pension Funds Act to ensure that your dependants – those who rely on you for financial support, which may or may not be the same as your nominated beneficiaries – get preference.

Getting personal advice can help give you peace of mind that your retirement planning is on track. You can make a number of decisions to support a good retirement outcome. How much should you save each month? How do you allocate across the different retirement fund vehicles? How do you choose the best mix of investments available to you? How do you know whether you are saving enough? Should you supplement your retirement fund with additional savings? A professional financial advisor can help you answer these questions. They have the skills and expertise to help ensure your retirement plan supports the outcome you want, taking into account other factors that will affect your outcome, such as inflation. If you choose to invest in an RA, they can also help you make informed decisions about where to invest.

Even if you are still deciding between different retirement savings options or getting to grips with the rules of the fund you are currently invested in, the most important thing to remember is that every small contribution to your retirement savings makes a difference. So, start saving as soon as you can, contribute as much as you can, stick to your plan as much as you can, and speak to a financial advisor for guidance. And never take retirement money in cash when you change jobs.

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This information is intended for general information purposes only and is not legal advice.