Pension/Provident Funds

Inflation erodes large portions of even the most comfortable retirement plan. And because people live a lot longer these days, retirement money has to be spread over a longer period.

As a business owner, it is your responsibility to help your employees select a suitable retirement option. AMBITON can help. We will assist in your selection of the most suitable retirement plan for your company and, as required by law, we will help you communicate the plan clearly to your employees. The nuts and bolts need to be laid out:

• how the fund operates
• how they are likely to benefit from it eventually,
• whether the benefits that accrue to them will be enough to maintain a reasonable standard of living
• whether their medical expenses will be covered once they retire, and
• what they should do if they decide to change jobs.

What is the difference between a provident fund and a pension fund?

They are both funds so, in both, the benefits at retirement are dependent upon investment performance. The key differences lie in the way fund contributions are treated for income tax purposes and in the way the benefits are paid out.

Contributions to provident funds made by employers are tax deductible while contributions by members are not. To counter this, in many cases members do not contribute but let their employers make a bigger contribution.

Members' contributions to pension funds are tax deductible up to certain limits, as are those by employers.

The other difference: the way the funds' benefits are paid out. A provident fund's benefit is fully available in cash at retirement. By contrast, a pension fund is restricted to providing a maximum of one third in cash. A monthly pension has to be bought with the remaining two-thirds.

If you so wish, and if the fund rules allow it, you may buy a pension with the proceeds of a provident fund - and here you are not limited to taking only one-third in cash.

The tax on lump sums is the same using the normal retirement tax formula. Remember that as things stand, any money used to buy a pension will not be taxed as a lump sum but the pension itself will be taxed as income.

In some ways a provident fund provides greater flexibility than a pension fund, mostly because of the freedom to choose the proportions of cash and pension at retirement.