Georgie Engelbrecht

My sincerest apologies. I promised when I started writing this column that we would keep things basic and go through all the investment avenues. We’ve been doing that but I have rushed us along at a great rate and in doing so have forgotten one of the fundamental forms of investing. As it’s the 1st of February and everyone is well and truly back at school or work or varsity, I figured now might be a good time to go back to basics for a bit. So instead of trying to read before learning the alphabet, let’s start with A is for Apple.

The form of investment I am referring to is the humble provident fund – or pension fund – that most companies have you paying monthly contributions to by deducting an amount off your salary. It’s due to this ease of payment though, (you don’t actually see the cash coming into and going out of your bank account) that most people don’t pay that much attention to these funds.

So let’s take a moment now.

Firstly I mentioned pension and provident fund as if they are interchangeable.  Although they are similar, and can both use the same underlying investment funds, there are a few differences that distinguish them. At the most basic level, the difference between the two is how you receive your fund benefits.

If you are a member of a pension fund, at retirement age, you can chose to receive up to a third of your retirement benefit as a cash lump sum, while the remaining two-thirds will be paid out monthly as a sort of pension “salary”. Obviously you can choose not to take a lump sum pay-out at all, in which case your monthly payout will be higher.

A provident fund gives you the choice of receiving your entire retirement benefit as a lump sum, something which can be quite tempting – and with all things tempting there is an element of danger involved there too. Very few people these days remain with the same employer for the full duration of their careers and so the issue of what to do with your provident and retirement fund comes up as you prepare to move.

Enter more temptation. While there are preservation provident and pension funds, which are specifically designed to protect your retirement savings, many people choose to cash out what they have already accumulated. This is where a pension fund differs though, as it will only pay out once you have hit retirement age.

The tax man cometh

There are also tax differences to take into account: your pension “salary” will be taxed at the average tax rate at the time at which payments are made. If you elect to go the provident fund route and take your full lump sum, a portion of this will be tax free but the remaining amount will be subject to the tax man.

Here is a little incentive not to take all your cash when you change jobs – you won’t be taxed on the transfer of your savings to one of the preservation funds. But, more temptation though, and this time it leads to a pension payout loophole, having your money in a preservation fund allows you to withdraw the cash prior to retirement.

The pension/provident world seems akin to the Garden of Eden to me, (told you we were going back to basics) temptation around every corner, hence the A is for Apple. While free will is our double edged sword, just try to keep your eye on the end prize, not having to work till you are 80!

And while there is so much more to these funds, teaching is not always about giving all the answers.

In short, provident funds offer greater flexibility and allow members to contribute more to their retirement savings than pension funds. But as for which specific funds to invest in well, that is your homework.