Differences Between A Pension Fund And Retirement Or Living Annuities

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It is well-known that it is a great idea to prepare for the day you retire! The most understood fact about this preparation is that you will have a fund that will pay you each month.

The process of sitting down and going through the different types of funds one may have access to is a daunting thought at best. Speaking on the telephone with a tele-consultant who keeps saying words that the lay person does not understand is scary. Especially as they are saying these things in the hopes of gaining your trust that they know what they are talking about when in actual fact all they are doing is confusing you.

Therefore, for clarity’s sake, here is a brief outline of three very common funds; a pension fund, a retirement annuity and a living annuity.

Here is a brief outline of the three.

Pension Funds

A Pension Fund is an investment into your future. As a Pension Fund member you would pay a contribution to the fund each month which is put together creating a lump sum to be used as an income during retirement.

You get two types of Pension Funds, Defined Contribution Funds, and Defined Benefit Funds. Occasionally you may find a hybrid of the two.

A Defined Contribution Fund is a fund in which the benefits a member may be entitled to upon exiting the fund are determined by the contributions he/she pays each month. In this type of a fund, the risk is borne by the member.

A Defined Benefit Fund is a fund that uses a specific formula to determine an amount payable to the member upon their exit. In a fund such as this, it does not matter how much money you contribute to the fund, the benefit payable will remain the same. In this type of a fund, the risk is borne by the employer.

Retirement Annuity

Retirement Annuities could almost be compared to an insurance fund. It is a contract between an individual and the fund. The member would invest their money into an annuity fund which can provide for a steady income during ones retirement. A very large difference between a Retirement Annuity and a Pension Fund is that the benefits that have accrued in the Retirement Annuity Fund cannot be withdrawn until the member has in fact reached the age of retirement. This age is currently at 55 years old.

Living Annuity

A Living Annuity is not considered to be a pension fund at all. A living annuity is a fund you place all your money into once you retire, and it will then pay out monthly.

The money you place into the Annuity will then grow according to the agreed upon interest rate. The larger the sum of money placed into the fund, the more it will grow over time. Obviously the more you are paid each month, the faster the fund will depreciate, however if you were to take smaller amounts, the total within the fund would grow faster.

It is very important to take into account that a Living Annuity is not a fund to which you would contribute each month. The only amount paid into the fund is the initial amount upon signing up for the Fund. That amount is then invested and grows accordingly and is from where your monthly income is to be taken.

Should you find yourself in a position where you are unsure what choice to make, or if there is a dispute about your fund or that of a loved one, please contact us immediately. We can guarantee that one of our specialised attorneys will be by your side and break down all that jargon so that you understand exactly where you stand.


Duncan O’Connor

Candidate Attorney

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