What is a provident fund and how does it work?

A provident fund is a system in which you invest while you are employed and receive benefits after you retire. This is a government-controlled compulsory retirement savings strategy for workers who can put a portion of their monthly savings into a retirement fund. The whole process is overseen by EPFO ​​(Employees Provident Fund Organization). Organizations with more than 20 employees are eligible for their PF and must register with EPFO.

In South Africa, a Provident Fund is a type of retirement fund that receives frequent contributions from both the employee and the employer. Before March 1, 2021, when you resigned or retired, you could take the entire sum as cash, which would be taxed. However, with the retirement reforms introduced on March 1, 2021, provident funds are now more similar to pension funds.

If you leave a company before you retire, for example when you resign or are retrenched, you may have to move your retirement savings out of the company fund. You can move your savings either to your new company’s fund, a preservation fund, or to a retirement annuity fund. You can take a cash payout, but you should be aware that this cash payout will be subject to tax.

The growth and income within your fund while you are a member of the fund are tax-free. Tax is only payable when you access your funds. When you retire, at age 55 or older, you’re allowed to take a maximum of one-third as a cash lump sum (the cash lump sum is taxable) from your retirement annuity. The balance must be used to purchase an income annuity (the income annuity is taxable). If the total amount in the fund is less than R247,500 you’re not limited to taking only 1/3 of your savings as a lump sum. You can take the full amount as a cash lump sum, subject to tax.

Your employer’s contribution to your retirement fund (pension fund or provident fund) is a fringe benefit taxed in your hands. Your contributions to your retirement fund plus your employer contributions to your retirement fund, are tax deductible up to certain limits. The growth and income within your fund while you’re a member of the fund is tax-free. Tax is only payable when you access your funds.