Updated 17.09.2021

Retirement Annuity Vs Pension Fund

Which is better, retirement annuity or pension fund? Which of these two can save you more on taxes? What is the difference between a Retirement Annuity and Pension Fund? What are the advantages and disadvantages of each option?

In this comparison article on retirement annuity vs pension funds, you’ll learn more about each retirement product and how you can maximize its benefits to your advantage. 

Retirement Annuity VS Pension Fund

What is a Retirement Annuity?

A retirement annuity (RA) provides an effective way to save money for retirement because of the tax savings it offers. 

In an RA, you will make monthly contributions to a personal fund which is usually done through debit order. You can choose which type of investments to put the money you saved in your RA. 

While you have the freedom to choose which asset to invest in, some financial institutions offer managing services so you won’t have to worry about putting your money in the most profitable investment.

When you reach the age of 55 years old and decide to retire, you can take up to one-third of your RA as a cash lump sum. The lump sum is taxable. The remaining balance on the fund must be used for income annuity which is also taxable. 

If the total amount of money in the fund is less than R247 500, you can withdraw the whole savings as a lump sum. This is also taxable.

An RA is independent and different from the one provided by your employer. This means that you can switch jobs without affecting the fund.

A retirement annuity is perfect if you’re self-employed or if your employer does not support a pension fund. See more about how to choose the best retirement annuity.

What is a Pension Fund?

A pension fund is another way to save money for retirement, but this one depends on your employer. In a pension fund, your money will be managed by trustees who have the power to choose which assets to invest in. There are tax deductions on your contributions to the pension fund up to a certain limit.

Upon retirement, you can take up to one-third of your savings in the form of a lump sum payment. The lump sum is taxable. 

Similar to an RA, the balance must be used to purchase an annuity that is also taxable. Also, if your savings are below R247 500, you can withdraw your full savings as a lump sum. 

If you leave the company before retirement, you have to move your savings in the pension fund to either:

  • a preservation fund
  • a retirement annuity
  • the pension fund of your new company

Alternatively, you may get up to one-third of the saved amount as a cash payout.

The income earned by the fund while you are still a member is tax-free. You only get taxed when you access the fund for withdrawal.

Difference between Retirement Annuity and Pension Funds

Here are the pros and cons of each type of retirement product to help you learn more about them.

Retirement Annuity

Pros:

  • Anyone can avail a retirement annuity
  • Contributions are tax-deductible
  • Investment gains inside the fund are tax-free
  • Retirement savings are not counted as part of your estate
  • Choose the underlying asset classes to invest in
  • Contribute what you can afford
  • RAs are protected from creditors

Cons:

  • Restrictions on the total value of offshore investments 
  • Equity exposure is limited to 75%
  • Funds are inaccessible until you reach 55 years old
  • Fees depend on the size of your account
  • Charges apply when you terminate the plan or take an early retirement

Pension Fund

Pros:

  • Contribution is deducted before you receive your salary
  • Employers can match your contributions to the fund
  • You can contribute more to reduce your tax bill and eventually get you into a lower tax bracket
  • Trustees will decide how to manage the money, so you can still grow your savings even if you don’t know anything about existing investment options

Cons:

  • Investment options are limited
  • You have no choice but to accept the pension fund offered by your employer
  • No flexibility to increase or decrease contribution
  • Risk of poor returns

When choosing between retirement annuity vs pension fund, you have the option to invest in both retirement products to optimize your savings. You do not have to get one over the other because each serves a different purpose and offers unique advantages you can benefit from, depending on your situation. 

If possible, contribute to your pension fund while also setting aside money for your retirement annuity, so you can enjoy the best of both worlds when you retire. Invest as early as possible to maximize the benefits of each product.

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