Are you a member of a pension fund? Provident fund? Retirement annuity fund? Umbrella fund? Preservation fund? Is it a defined contribution or a defined benefit fund? Can you preserve your investment in a tax efficient manner if you are forced to exit a pension fund? What entitlements do you have against your spouse’s pension interest on divorce? What happens to your pension assets when you die?

These and many other questions are likely to arise at some point for most people who are members of pension funds. There is a considerable overlap between pension law and tax legislation, and this has led to a confusing array of different types of pension fund, largely characterized by the tax implications of each. Here are some very basic definitions and explanations of the above concepts.


Pension fund
In the broader sense, this is any fund set up for the purpose of providing benefits on retirement which is registered with the Registrar of Pension Funds in terms of the Pension Funds Act 24 of 1956. As such it is a generic term for all types of pension fund, whether pension, provident, retirement annuity, or preservation.

In its narrow sense a pension fund is a retirement fund in which an employer participates (called an occupational fund). The member may take up to one third of his retirement savings in cash at retirement, the balance being used to purchase a life annuity. Contributions to the fund are tax deductible in the hands of the employer and employee member.


Provident fund
A provident fund allows the member to take the entire retirement savings in cash at retirement, therefore giving greater control to the member. However, the contributions are only tax deductible in the hands of the employer.


Retirement annuity fund
These funds allow participation without an employment relationship, and are therefore ideal for the self-employed, or persons wishing to supplement their retirement savings. The member may retire at any age after 55 but may only take up to a third of the investment in cash, the balance once again purchasing an annuity. Contributions are tax deductible.


Preservation fund
A preservation fund, as the name suggests, is a vehicle that houses benefits which accrue from a previous fund until retirement, thus preserving the favourable tax status of the investment.


Umbrella fund
Many smaller employers cannot justify the administrative costs of establishing a pension fund for their employees. Umbrella funds are set up by major financial institutions in order to allow participation by several employers, thereby reducing the costs as a result of the economies of scale they can offer.


Trustees
Each fund has a board of trustees, including employee-elected trustees in most funds. The trustees are responsible for the management of the fund, and owe a high duty of care to the members as a whole, since they are administering assets for the benefit of others.


Defined benefit and defined contribution funds
These are descriptions of the types of benefit offered by a pension fund. In a defined benefit fund (very few of which still exist) the retirement benefit is calculated in relation to years of service and final salary. In a defined contribution fund, the final benefit is determined with reference to the contributions made and the growth on them over the term of membership.


Pension interest on divorce
This aspect of the law has seen dramatic changes in the last few years. The position now is that on divorce, if the court order (or consent paper) directs that a portion of one spouse’s pension interest is payable to the other, that amount is payable to the non-member spouse at the time of divorce (allowing for certain statutory periods for administration).


Benefits on death
Contrary to popular belief, the nomination form filled out by most fund members (indicating how they would like their fund benefits to be allocated on their death) is not binding on the fund or the trustees who are tasked with distributing it. Instead the trustees are bound by a statutory mandate which obliges them to consider both nominated beneficiaries as well as dependants (which are widely defined in the Act) when allocating the benefit. This is a very complex area of law and many claims are brought before the Adjudicator’s office involving dissatisfaction with such distributions.

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