What is a retirement fund?

A retirement fund is one into which you can save regular contributions while you are working to provide an income when you reach retirement age.

Retirement funds are defined in law as pension fund organisations and are regulated by the Pension Funds Act.

South Africans who save in these funds enjoy certain tax deductions on the amounts they contribute and they also do not pay tax on the interest income, dividends or capital growth earned by their savings in such a fund. These tax advantages are set out in the Income Tax Act. Read more: What are the tax advantages of contributing to a retirement fund?

Savings rules

As a retirement saver, you are obliged to save in a way that complies with investment guidelines set out in the Pension Funds Act to ensure that your investments are well diversified and protected from some investment risks. Read more: How must my retirement savings be invested?

When you reach retirement, you must use some of your savings to buy an annuity - a pension or an investment from which you can draw an income in retirement. Read more: What kinds of annuities are there?

How it is governed

Most retirement funds are governed by the Pension Funds Act and they must be registered with the Financial Sector Conduct Authority (FSCA). You can check if your fund is registered here.

Some funds, like the Government Employees Pension Fund, the Post Office Retirement Fund; the Telkom Pension Fund; the Transport Pension Fund, the Transnet Retirement Fund and the Transnet Second Defined Benefit Fund are governed by the laws that established them.

Each fund must have a board of trustees that governs the fund in the best interests of the members at all times. Trustees should either have the expertise to run the fund or use experts to assist them make good decisions about how to administer the fund and where to invest your money.

They must also communicate adequate and appropriate information to you, as a fund member. Read more: Who are the roleplayers in your retirement fund?

Each retirement fund has a set of binding rules about how the money is invested, when contributions are paid and how benefits are paid. These rules must be approved by the FSCA.

Funds' rules must also be approved by the Commissioner of the South African Revenue Service in order for you as a member to enjoy the tax incentives provided for in the Income Tax Act.

You can become a member of:  

An occupation-based retirement fund
Employers set up these funds, or participate in an industry or commercial umbrella retirement fund, in order to help employees leave employment at a particular age with substantial savings, and also to look after the welfare of their staff and their families should they die or become disabled before retirement.

Offering, benefits such as membership of a fund and employer contributions to a fund, can also give an employer a competitive advantage.

Occupation-based funds may be either a pension fund or provident fund.

Saving through a fund that your employer provides has some big advantages, including:

• Discipline
  If you are eligible, you have to belong and contribute to this fund. Regular savings from a young age is the most powerful force you can harness in providing for your retirement or even, your financial freedom
  
  
• Employer contributions
  If your employer contributes to your retirement fund on your behalf, don’t underestimate this value of that benefit.
  What your employer contributes is essentially additional salary, but you are obliged to save it and you get a tax benefit. The contribution gets added to your income as a taxable fringe benefit, but you enjoy a tax deduction when the contribution is paid to your retirement fund.
  The deduction offsets the fringe benefit, as long as your contribution is within the limits for a tax deduction to a retirement fund. Read more: What are the tax advantages of contributing to a retirement fund?
  When you consider leaving your employer, don’t forget to take into account any retirement fund contributions your employer makes. If you leave to work for yourself and want to keep up your retirement fund contributions, you need to not only match the amount you were contributing yourself, but also what your employer was contributing.
  
  
• Lower costs
  Occupational funds or funds your employer participates in may well have lower costs than funds you can access as an individual. This is because the administration for a group is less intensive than for an individual, and the expenses are spread over larger numbers.
  
  

A fund offered to individuals (a retail fund)

The financial services industry has set up retirement annuity funds to cater to individuals who are self-employed and individuals who want to top up their retirement savings. Read more: How do retirement annuities allow me to create my own retirement savings?

As an individual you can also transfer your savings to a preservation fund when you leave an employer and wish to preserve your retirement savings and keep them invested until retirement. Read more: What happens to my savings in an employer-sponsored fund if I leave my employer?