Pension Fund vs. Retirement Annuity: Which One Is Right for You?

When you start saving for your retirement it can be overwhelming with all the options out there. This is a big decision and commitment for an individual, so you need to choose the best option for your specific needs. While the rules for pension funds and retirement annuities used to be quite different, they’re much more aligned now. But there are still slight differences and some might even be deal-breakers for you.  

Pension Fund

Closely compared to provident funds, a pension fund is created through the company that employs you. Your money is managed by appointed trustees who decide on which assets to include. If you leave the company before you retire, then you have to move your long-term savings out of the company fund (and over to your new company’s fund) or you can withdraw all the cash.

Pros

• You don’t have to worry about how much to include. The amount you contribute depends on your salary package.
• Your retirement contribution is deducted by your employer before you get your salary. This helps you to invest in your retirement even if you lack the discipline to save on your own.
• Contributing into your retirement fund immediately reduces your tax bill when, for example, it puts you in a lower tax bracket. So you don’t have to wait for a tax refund later in the year.
• It’s the most affordable way to save, since your employer sets it up and costs are pooled together.
• If you leave the company before retirement then you have to move your savings. You can choose to withdraw all the cash in your fund (however, this lump sum will be taxed).

Cons

• The retirement fund investment options could be limited because the funds are chosen by your employer and not necessarily for your individual needs.
• There’s less flexibility, as your contribution amount is usually fixed for at least a year, with your employer only allowing you to change the amount on a fixed date.

Retirement Annuity

Anyone can buy a retirement annuity (RA) – it’s completely independent from your employer and you can decide on the amount you want to contribute (within the limits of the retirement fund regulations).

Pros

• There’s more flexibility as most RAs let you change your monthly contribution amounts later on.
• You have more control and you can temporarily pause contributions to your RA if you’re having financial struggles.
• It is not tied to your employment. If you decide to leave the company you’re at or if you become your own boss, then your contributions can continue.
• There are great tax benefits, as retirement annuity contributions are often tax-deductible.

Cons

• You have to submit a tax return for the tax incentive, so the relief isn’t immediate.
• Withdrawals aren’t allowed unless you retire early from ill-health or emigrate.

The information in this article is for information purposes only and does not constitute professional advice.