The main aim of a pension or provident fund is to provide benefits for its members when they retire from employment. The fund also usually pays benefits when
a member dies while still working, or is unable to work because of illness, or is retrenched.
The main difference between a pension fund and a provident fund is that if a pension fund member retires, the member gets one third of the total benefit in a cash lump sum and the other two-thirds is paid out in the form of a pension over the rest of the member’s life.
A provident fund member can get the full benefit paid in a cash lump sum. Pension funds also offer better tax benefits to employees. An employee’s contributions to a pension fund are deductible for tax, while contributions to a provident fund are not.
There are advantages and disadvantages to both types of funds. It will depend on a person’s own financial needs. However, one of the strongest arguments in favour of provident funds and the lump sum payment concerns the means test used to work out whether a person qualifies for a state old age pension.
Usually if a person receives a private pension, that person is disqualified from receiving a state old-age pension. If a person gets a lump sum payment then that person may also qualify for a state pension in some cases.