You and Your Rights: Pension and Provident Funds

Summary

  • If a pension or provident fund member dies, the benefit will be given to his or her dependants, such as a spouse or children
  • All employees are entitled to an annual benefit statement from their employer
  • A provident fund reserves benefits for payment upon retirement, whereas a pension fund pays a third of benefits at retirement, with the rest paid throughout the lifetime of each member.
  • An employee and his or her employer must both complete a withdrawal form in order to claim benefits
  • Though still required to contribute to the fund, for the most part employers cannot take deductions from employees on unpaid leave
  • In the event an employer fails to make sufficient contributions to the fund, the employee may take his or her grievance to the Pensions Funds Adjudicator

Your Rights

What is a pension or provident fund?                             

A pension or provident fund is set up to provide an income for a member on retirement or an income for their dependants if the member dies. 

What is the main difference between a pension and provident fund?

A pension fund pays a third of the benefit as a lump sum on retirement and the remaining two thirds of the benefit is paid out over the beneficiary’s lifetime.

A provident fund pays all its retirement benefits as a lump sum cash benefit on retirement.

What is a defined benefit fund?

A defined benefit fund is one in which the promised benefit is calculated in relation to the member’s salary and their years of service. The benefit can therefore be calculated at any time based on the member’s salary.  

What is a defined contribution fund?

A defined contribution fund is one in which the amount contributed by the member and employer is defined in the rules of the fund but there are no set benefits. The end benefit is based exclusively on the contributions to, and the investment earnings of, the fund itself.   

Who is a dependant?

When a member of a fund dies, his or her dependants will receive the benefit from a pension or provident fund. Dependants are usually anyone who was looked after by the member like a spouse or children. However, anyone who can prove that they were financially dependent on the deceased for everyday necessities will have a claim.

What other benefits can members claim from a pension or provident fund?

Individual members or dependants can claim certain kinds of benefits like disability, retrenchment, funeral, divorce and maintenance benefits.

Do government employees have their own fund?

Yes. The Government Employees’ Pension Fund (GEPF) is where government employees’ claim their pensions. The fund is also administered by the GEPF.

Who contributes to a retirement fund?

Both the employer and employee contribute to the fund. Usually, the employee contributes a percentage of his salary and the employer matches his or her contribution.  

Who manages the contributions to a fund?

Private company employers appoint a specific company to administer the pension or provident fund of employees. Usually, funds are administered by insurance companies and bargaining councils. A Board of Trustees, chosen by the fund, the employers and the employees, oversee the management of the fund.

How does unpaid leave affect contributions to the fund?

It depends on the rules of the fund but generally, if a member is on approved leave without pay, an employer cannot deduct contributions from their salary but the employer must continue to contribute his or her payments.

However, if the member is on leave with full pay, he or she will continue to have their contributions deducted as if they were working.

What happens if contributions are not received by the Administrator of the Fund?

A member has the right to lodge a complaint with the Pensions Funds Adjudicator (PFA) if an employer deducts contributions but doesn’t pay the monies over to the fund or to the administrator of the fund.

What can the Pension Fund Adjudicator do?

The Pensions Fund Adjudicator can make a determination or order against an employer or an administrator of the Fund, forcing them to comply with the Pension Funds Act and compensate the member for any loss they have incurred. Any person or company who contravenes the Act could be penalised and fined.

What rights do employees have in relation to their employers?

Employees have the right to request an annual benefit statement from their employer. This will show the employee if the employer has made the proper deductions each month and paid them over to the fund itself.

Employees also have the right to complain to the Pension Funds Adjudicator (PFA) if they have any problems with their contributions or with the claiming of their benefits.

How does a member claim his or her benefits?

It is important to first establish whether the applicant is the member or a dependant beneficiary of the fund. Both the employer and the employee (unless deceased) should complete the withdrawal form. They will need a certified copy of their identity document and recent bank details. If the applicant is a dependant and the member is deceased, then a death certificate must be attached to the withdrawal form.

The payment received depends on the rules of the fund and whether it is a defined benefit or a defined contribution fund.

In the event of a dispute over benefits, the member or dependants can lodge a complaint in terms of Section 30a of the Pension Funds Act.

What tax penalties do you pay if you withdraw benefits before retirement?

A member can withdraw their pension or provident fund benefits if they resign, or they are retrenched, or if a former spouse is awarded some of their benefits in terms of a divorce order. From March 1 2010, the withdrawal of benefits from retirement funds are taxed as follows:

R0-R22 500: no tax
R22 501-R600 000: 18 percent
R600 000-R900 000: 27 percent
R900 001 and more: 36 percent

Remember, members can reinvest their savings instead of taking the benefits as cash.  

Can you claim Maintenance Benefits from pension or provident fund contributions?   

Yes, a claim can be made against a fund member for maintenance owed and for future maintenance which will become payable by a member in terms of a maintenance order.