Retirement Annuity vs Pension vs Provident Fund in SA: Differences Explained

By / September 24, 2025

South Africa’s retirement landscape has shifted in recent years, especially with the introduction of the two-pot retirement system. If you […]

Retirement Annuity vs Pension vs Provident Fund in SA Differences Explained

South Africa’s retirement landscape has shifted in recent years, especially with the introduction of the two-pot retirement system. If you are weighing up a Retirement Annuity (RA), a pension fund, or a provident fund—or already belong to one and want to understand the rules—this guide explains how each works, how they are taxed, when you can access your money, and what happens at retirement.

In this article you will learn:

  • What an RA, pension fund, and provident fund are, and who each one suits
  • How the two-pot system (Savings Pot, Retirement Pot, and Vested Pot) works
  • Tax rules on contributions, withdrawals, and retirement benefits
  • Access rules before retirement and at retirement, including the de minimis threshold
  • How provident fund annuitisation and grandfathering work
  • A side-by-side comparison table and practical scenarios

TL;DR (at a glance)

  • From 1 September 2024, new contributions to retirement funds are split: one-third to a Savings Pot (limited access once per tax year) and two-thirds to a Retirement Pot (preserved for retirement). Amounts saved before that date sit in a Vested Pot with legacy rules.
  • Contributions to RAs, pension funds, and provident funds are tax-deductible up to 27.5% of the greater of remuneration or taxable income, capped at R350 000 per tax year (combined across all funds).
  • At retirement, the default rule is that at least two-thirds must provide an annuity income. If your total benefit in a particular fund is R247 500 or less, you can usually take it all in cash (the de minimis rule).
  • Provident funds have largely aligned with pension funds and RAs at retirement from 1 March 2021, with grandfathering for members aged 55 or older on that date in the same fund.

1) Quick definitions and who they suit

Retirement Annuity (RA)

An RA is an individual retirement product that you set up yourself. It is not tied to an employer, which makes it portable. You control contributions and investment choice within product rules.

Best for: Self-employed individuals, contractors, freelancers, or employees who want extra retirement savings outside the workplace scheme.

Pension fund

A pension fund is an employer-sponsored retirement plan. Employer and/or employee contributions are typically a fixed percentage of salary. Funds are run by trustees, with default investment strategies and options set by the fund rules.

Best for: Employees whose employers contribute or match contributions, and who benefit from institutional fees and governance.

Provident fund

A provident fund is also employer-sponsored. Historically, members could take the full benefit in cash at retirement. From 1 March 2021, new contributions for members under 55 became subject to annuitisation rules similar to pension funds and RAs, with grandfathering for certain older members and vested balances.

Best for: Employees who are in a provident structure, especially where employer contributions and fees are attractive; members with grandfathered rights.

2) The two-pot retirement system (effective 1 September 2024)

The two-pot system aims to strike a balance between preservation for retirement and limited access during one’s working life.

  • Vested Pot: This contains benefits accumulated before 1 September 2024. These amounts remain under legacy rules. A once-off seed capital amount (the lower of 10% of the vested balance or R30 000) was transferred into the Savings Pot when the system went live.
  • Savings Pot (one-third of new contributions): From 1 September 2024 onward, one-third of new contributions goes here. You may make one withdrawal per tax year, subject to fund minimums. Withdrawals are taxed at your marginal rate and reduce your retirement capital.
  • Retirement Pot (two-thirds of new contributions): From 1 September 2024 onward, two-thirds of new contributions goes here and is preserved until retirement. These amounts are used to acquire an annuity unless the de minimis rule applies.

Why it matters: Previously, many members eroded their savings by cashing out when changing jobs. The two-pot system improves preservation while offering limited, structured access without resigning.

3) Tax treatment across RA, pension, and provident funds

Contributions:

  • You may deduct up to 27.5% of the greater of your remuneration or taxable income each year, subject to a R350 000 annual cap, calculated across all your retirement funds combined.
  • Employer contributions are taxed as a fringe benefit in your hands, but they still count towards your deductible limit.
  • Excess contributions that exceed the cap are carried forward to future tax years, and may increase the tax-free component of your retirement benefits.

Growth inside the fund:

  • Investment growth inside RAs, pension funds, and provident funds is generally sheltered from income tax, dividends tax, and capital gains tax, allowing compound growth until benefits are taken.

Withdrawals and retirement lump sums:

  • Pre-retirement withdrawals are taxed according to the withdrawal lump-sum tax table.
  • Retirement cash amounts are taxed according to the retirement lump-sum tax table. Previous lump sums affect the tax calculation, and a SARS tax directive is issued for each lump sum.

4) Access rules before retirement

If you leave your employer (resignation, dismissal, retrenchment)

  • Pension and provident funds: You may preserve, transfer to another approved fund, or withdraw in cash (tax consequences apply). Under two-pot rules, only your Savings Pot allows limited annual access; Retirement Pot amounts remain preserved; Vested Pot follows legacy rules.
  • RA: Pre-55 access is highly restricted. Typical exceptions include permanent disability, a small-balance de minimis, or cessation of South African tax residency under specific conditions.

Savings Pot access (applies to all fund types)

  • You can make one withdrawal per tax year from the Savings Pot, subject to minimums and administration rules. The withdrawal is taxed at your marginal rate. Repeated use will reduce your eventual retirement income and may push you into a higher tax bracket for the year.

5) What happens at retirement?

Unless your total benefit in a particular fund is R247 500 or less (the de minimis rule), the default rule is annuitisation: at least two-thirds of your retirement value must provide an income via a life annuity, a living annuity, or a blend of the two.

  • De minimis rule: If your total benefit in a fund is R247 500 or less, you can usually take the full amount as cash.
  • Provident fund annuitisation (from 1 March 2021): Members who were under 55 on 1 March 2021 must annuitise two-thirds of contributions made on or after that date. Members who were 55 or older on 1 March 2021 have grandfathered rights in that same fund, meaning they may still take full cash at retirement from those benefits (including subsequent contributions in that fund), subject to the fund rules.
  • Two-pot at retirement: Your Retirement Pot funds the annuity. You will typically be able to decide how to treat any remaining Savings Pot balance at retirement, which may include taking cash or using it to improve annuity income, as allowed by the prevailing rules and fund processes.

6) RA vs Pension vs Provident: side-by-side comparison

FeatureRetirement Annuity (RA)Pension FundProvident Fund
Who sets it up?IndividualEmployerEmployer
ContributionsFlexible, self-directedUsually a fixed % of salary (employer and/or employee)Usually a fixed % of salary (employer and/or employee)
Tax deduction (combined cap)Up to 27.5% of remuneration or taxable income, capped at R350 000 p.a.SameSame
Two-pot split (from 1 Sep 2024)⅓ Savings, ⅔ Retirement⅓ Savings, ⅔ Retirement⅓ Savings, ⅔ Retirement
Pre-retirement accessVery limited before age 55 (few exceptions)Possible on job exit; Savings Pot withdrawal once per tax yearPossible on job exit; Savings Pot withdrawal once per tax year
At retirement (default)Max ⅓ cash; ≥⅔ used for an annuity (unless de minimis applies)SameSame for post-2021 contributions; grandfathering for certain older members and vested amounts
PortabilityHigh (not employer-tied)Transfer on job changesTransfer on job changes
Typical feesRetail; compare platforms and portfoliosOften lower due to institutional scaleOften lower due to institutional scale
Best forSelf-employed; additional top-upsEmployees with employer co-contributionsEmployees; those with grandfathered rights

7) Fees, governance, and investment choice

  • Fees: Employer funds often secure lower institutional pricing for administration and investment management. RAs can also be cost-effective, particularly where index-tracking portfolios and clean-class fees are available. Always compare the all-in fee (administration, investment, and advice).
  • Governance: Employer funds are governed by trustees with fiduciary duties and are regulated under the Pension Funds Act and fund rules. RAs are contractual products governed by product terms and regulated disclosures.
  • Investment choice and Regulation 28: All three vehicles must comply with Regulation 28, which limits exposure to certain assets to manage risk and promote diversification, including limits on foreign exposure. In an RA you typically choose from a range of compliant portfolios; in employer funds you will usually have a default strategy and a list of options.

8) Practical scenarios

A) Self-employed consultant with variable income
You want control, portability, and the same tax benefits as employees. An RA lets you contribute flexibly and top up near financial year-end to optimise the deduction. The Savings Pot offers limited emergency access once per tax year, but habitual use will compromise outcomes.

B) Employee with strong employer match
If your employer contributes generously to a pension or provident fund and fund fees are low, prioritise this benefit first. You may then add an RA for extra contributions or to diversify investment strategies beyond the employer’s menu.

C) Long-standing provident fund member aged 60
Because of grandfathering, you may still be allowed to take full cash from your vested provident benefits (and contributions in the same fund after March 2021) when you retire, while a younger colleague will need to annuitise. Confirm exactly what portion of your benefit is vested versus subject to annuitisation.

D) Young professional who changes jobs every few years
Resisting the temptation to cash out is crucial. Use preservation or approved transfers on job changes, and treat the Savings Pot as a last resort. Regular withdrawals undermine compounding and may increase your tax bill in the year of withdrawal.

9) Planning your retirement income: living vs life annuity (or a blend)

  • Life annuity: Pays a guaranteed income for life, transferring longevity and investment risk to the insurer. Income usually escalates by a fixed rate or with inflation, depending on the option you choose. You give up flexibility and capital access.
  • Living annuity: Your capital remains invested and you choose a drawdown rate within regulatory limits. You carry investment and longevity risk and must manage sequencing-of-returns risk.
  • Blended approach: Many retirees blend both to cover essential expenses with guaranteed income while leaving flexibility for discretionary spending and legacy goals.

10) The compliance view: divorce orders, death benefits, and transfers

  • Divorce orders: Retirement benefits may be assigned under a divorce order in terms of applicable legislation and fund rules, with specific tax treatment.
  • Death benefits: Trustees of employer funds have a duty to allocate benefits fairly among dependants and nominees in terms of legislation and fund rules. RAs follow policy terms for beneficiaries and nominations.
  • Transfers and preservation: Moving between funds must follow approved transfer rules to maintain tax-favoured status. Keep documentary evidence to protect any excess (non-deducted) contributions so that your tax-free components are correctly recognised at retirement.

11) Common mistakes to avoid

  1. Cashing out on job change: This is the single biggest destroyer of retirement outcomes. Preserve or transfer whenever possible.
  2. Overusing the Savings Pot: Treat it as an emergency valve, not a budget line item.
  3. Ignoring fees: A one percentage point fee difference compounded over decades can materially reduce your retirement income.
  4. Inappropriate asset mix: Ensure your portfolio remains Regulation 28 compliant and aligned with your risk tolerance and time horizon.
  5. Poor documentation: Keep records of all contributions and transfers, especially excess contributions, to ensure correct tax-free calculations later.

12) Action checklist (SEO and LLM-friendly)

  • Know your status: Employee with an employer fund or self-employed with an RA (or both).
  • Maximise the deduction: Aim for 27.5% of remuneration or taxable income each year, up to R350 000, across all funds.
  • Map your pots: Understand what sits in your Vested Pot, what will go into Savings, and what must remain in Retirement.
  • Set a rule for Savings Pot use: One withdrawal per tax year is permitted, but consider using a separate emergency fund to reduce reliance on it.
  • Plan your retirement income: Decide on life annuity, living annuity, or a blend well before retirement.
  • Audit fees annually: Compare your all-in costs and switch to lower-cost options where appropriate.
  • Preserve on job changes: Use approved transfers and preservation funds rather than cashing out.
  • Check provident grandfathering: If you were 55 or older on 1 March 2021 in the same provident fund, confirm your vested and non-vested breakdown.
  • Keep records: Document excess contributions and transfers to protect your tax-free elements at retirement.
  • Get advice at key moments: Job changes, retrenchment, divorce, emigration, and within five years of retirement.

13) Frequently asked questions

Can I contribute to both an employer fund and an RA?
Yes. Your deduction limit of 27.5% up to R350 000 per tax year applies across all retirement contributions combined, including employer contributions treated as a fringe benefit.

Does the two-pot system change my tax deduction?
No. The contribution deduction rules have remained the same. The two-pot system changes how you may access a portion of new contributions, not the deduction calculation.

How often can I access the Savings Pot?
You can usually make one Savings-Pot withdrawal per tax year, subject to the fund’s minimum withdrawal amount and administrative rules. It is taxed at your marginal rate.

What is the de minimis threshold at retirement?
If your total benefit in a fund is R247 500 or less at retirement, you can usually take the full amount as cash rather than buying an annuity.

What is Regulation 28 and why should I care?
Regulation 28 limits certain exposures (for example equities and offshore assets) to diversify risk within retirement funds. It helps protect members who might otherwise take on excessive risk.

14) The bottom line

  • Same tax incentives, different wrappers: RAs, pension funds, and provident funds share the same tax-deduction framework. Choose based on who contributes, fee levels, portability, and how much control you want.
  • Two-pot is the new normal: Treat Savings Pot access with caution. The Retirement Pot is designed to fund your future income, while the Vested Pot retains legacy rules.
  • Provident funds mostly aligned: The historic differences are largely harmonised with pension funds and RAs, except for vested rights and grandfathering.
  • Plan backwards from your income needs: Decide the income you will need in retirement, then use the cheapest, best-governed vehicle to build—and preserve—that capital.

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