The terms retirement fund vs pension fund often confuse South Africans. Many people use them as if they mean the same thing, but they don’t. A retirement fund is the umbrella category that includes pension funds, provident funds, retirement annuities, and preservation funds. A pension fund is one type of retirement fund with its own rules for contributions, tax, and withdrawals.
The launch of the two-pot retirement system in September 2024 changed how these funds work. To make smart financial decisions, you need to know the differences and understand how the reforms affect your savings.
What is a Retirement Fund?
A retirement fund is any structure designed to help you save for life after work. The main types include:
- Pension Funds – Employer-based funds that require annuity purchases at retirement.
- Provident Funds – Employer-based funds that historically allowed lump sum withdrawals.
- Retirement Annuities (RAs) – Personal funds not tied to employers, with strict access rules.
- Preservation Funds – Funds where you transfer savings from a previous employer to keep them invested.
All these options provide tax benefits and protect your money until retirement.
What is a Pension Fund?
A pension fund is an employer-sponsored plan. Both you and your employer contribute each month. These contributions are tax-deductible up to annual limits.
When you retire, you can take up to one-third of your savings as a cash lump sum. That lump sum is taxed using SARS’ retirement tax tables. You must use the remaining two-thirds to buy an annuity, which pays you a monthly income.
This rule stops people from spending all their savings at once and helps secure income for life.
Pension Fund vs Provident Fund
In the past, provident funds allowed members to withdraw their full balance as a cash lump sum at retirement. This gave flexibility but often left retirees without long-term income. Pension funds limited lump sums to one-third and forced the rest into annuities.
Since 1 March 2021, new provident fund contributions follow the same rules as pension funds. At retirement, members must use two-thirds to buy an annuity.
Workers who were 55 or older on 1 March 2021 and stayed in the same provident fund keep their vested rights. They can still use old rules for contributions made before that date.
The Two-Pot Retirement System
The two-pot system, which started on 1 September 2024, changed retirement savings in South Africa. It applies to all retirement funds, including pension funds.
As explained by National Treasury:
- Savings Component – One-third of contributions. You can withdraw once per tax year, with a minimum of R2 000. Withdrawals are taxed at your marginal rate.
- Retirement Component – Two-thirds of contributions. Locked in until retirement and used to buy an annuity.
- Seeding Amount – A once-off transfer from existing balances into the savings component, capped at R30 000 or 10% of your savings.
This system gives you access to funds in emergencies but keeps most of your savings preserved for retirement.
Retirement Fund vs Pension Fund: Key Differences
| Feature | Retirement Fund (General) | Pension Fund (Specific) |
|---|---|---|
| Scope | Includes pension, provident, RA, and preservation funds | Employer-based fund only |
| Contributions | Employer, employee, or individual depending on type | Employer and employee |
| Withdrawals | Rules differ by fund type | One-third lump sum; two-thirds annuity |
| Tax Benefits | Contributions deductible; investment growth tax-free | Same; lump sums taxed on withdrawal |
| Reforms | All subject to two-pot rules | Directly affected by two-pot system |
The two-pot system has already shown how much South Africans value access to their savings. Large withdrawals took place shortly after implementation, proving that flexibility is essential. But this trend also highlights a risk: spending too much now can leave you short in retirement.
Making the right choice between a retirement vs pension fund is not just about language. Retirement funds cover all savings vehicles, while pension funds are a specific employer-based option with rules that protect your long-term income.
CHECK OUT: South Africans Living Longer: How to Plan for a Longer Retirement and Avoid Financial Strain
The two-pot system aligned fund rules and gave workers limited access to savings. While this adds flexibility, it also demands discipline. Use the savings component only when necessary, preserve as much as possible, and focus on securing a steady income for life after work.