Renette Zeelie: 018 786 1882 | Charl Oosthuizen: 083 377 1441 | Johan Potgieter: 072 928 5380

How Does a Pension Fund Work?

by | Jun 11, 2015 | Blog | 0 comments

Doing retirement planning early enough is the only way to ensure financial independence and have peace of mind later on in life. Having a good idea about the way in which a pension fund works will be the key to making the right decision.

Overview A pension fund is established by a person’s employer and is used for the purpose of accumulating interest over the money invested. Both the employer and the employee can contribute financially to the pension fund.

The aim of the fund is to accumulate a significant enough sum that will ensure problem-free retirement. For the purpose of boosting the effectiveness of this tool, the fund is usually run either by a bank or an insurance company.

Individuals that have a pension fund can enjoy four kinds of benefits:

Withdrawal benefits,

Retrenchment benefits

Retirement benefits

Insured benefits.

The first two varieties are paid to workers who are either resigned or retrenched. The third variety is provided upon retirement and the fourth one is paid to workers who are disabled or to family members upon the death of the worker.

Pension Funds in South Africa:

The South African pension fund industry has started to gain a lot of prominence lately. The robust economic growth in the region and social reforms have both contributed to the popularity of such investment products.

Though there were some announcements of government attempts for the nationalization of pension funds, these original claims have never come true. Though the government has proposed some retirement reforms, the rumour about nationalization started due to a misunderstanding of official information.

Pension and Provident Funds:

There is one big difference between pension and provident funds. In the case of a pension fund, the worker gets a portion of the money in cash upon retirement and the rest is divided in instalments. In the case of a provident fund, the entire sum is received in cash upon retirement.

The two products are similar and picking one or the other will depend entirely on personal preferences and individual fiscal discipline.

Pension funds are growing in popularity because of the flexibility and the monetization these provide. Learning a bit more about the option and talking to an employer about it is the best way to figure out whether you can get the benefits from this opportunity and ensure your financial independence upon retirement.

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