Provident Fund vs. Pension Fund: An Overview
Provident funds and pension funds are two types of retirement plans used around the world, but their specifics differ from region to region.Provident funds, for example,are prominent in Asia, generally operating like Social Security does in the United States.
Pension funds, also known as pension plans ordefined-benefit plans, are offered by employers and governments, usually providing a retirement benefit to participants equal to a portion of their workingincome. There are some differences in how contributions are made and how benefits are accrued. The most significant differences are based on how benefits are paid.
Key Takeaways
- A provident fund is a government-backed retirement fund.
- A pension plan is a retirement plan run by employers and governments.
- Pension funds operate much like annuities.
- Provident funds operate like a mix of Social Security and 401(k)s.
Provident Fund
A provident fund is a retirement fund run by the government. They are generally compulsory, often through taxes, and are funded by both employer and employee contributions. Governments set the rules regarding withdrawals, including minimum age and withdrawal amount. If a participant dies, his or her surviving spouse and dependents may be able to continue drawing payments. Unlike the U.S. Social Security system, workers in provident funds often only pay into their own retirement account, rather than a group account, so in this sense, a provident fund is similar to a 401(k) account. One key difference, though, is that in a 401(k) account, the account holder makes the investment decisions, while in a provident fund, the government makes the investment decisions.
Members of provident funds are able to take out a portion of their retirement benefits, typically up to one-third, in alump sumup-front. The remaining benefits are distributed in monthly payouts. The tax treatment of lump-sum withdrawals may vary between regions.
Pension Fund
A pension plan is a retirement plan in which an employer, and often the employees, make contributions into a pool of funds set aside for the workers' future benefit. The funds are invested on the employees' behalf, and the earnings on the investments help fund the workers' lives upon retirement.
Some pension funds may allow individual participants to choose investments and contribution amounts, while most provident funds have compulsory contributions and centrally-run investments. Pension fund payouts are taxed.
Upon retirement, members of a pension fund may be able to take out their benefits in a lump sum, though the more common course is to receive monthly payments.
What Is the Purpose of a Provident Fund?
A provident fund is designed to create a secure retirement for you. Though some people may not embrace its compulsory requirements, a provident fund's mandatory contributions take the guesswork out of how much to save.
What Is a Provident Fund in Simple Words?
A provident fund is way to save for retirement. It's backed by the government. You and your employer put money in so it can grow. Then when you retire, you can take money out, either all at once (up to a point) or month by month.
How Does a Provident Fund Pay Out?
A provident fund may pay out as a monthly payment, similar to an annuity, or as a lump sum. Typically there is a cap on the lump sum payment, such as up to a third of the entire benefit. It depends on the details of the plan.
What Is the Difference Between a Provident Fund and a Retirement Annuity?
Annuities may give you more options for your investments than a provident fund. Also, with a provident fund, contributions are often compulsory. That's not the case with annuities. And whereas a provident fund is offered through an employer, you can purchase an annuity directly through an insurance company. However, annuities tend to come with higher fees.
The Bottom Line
In a sense, the benefits of a pension fund are more like an annuity, while the benefits of a provident fund are more like Social Security. The other major difference lies in the compulsory nature of provident fund contributions, whereas saving for a pension is not mandatory. Both are low-cost, tax-advantaged accounts.
If you have questions about the ins and outs of your plan, talk to your plan administrator.
FAQs
A provident fund is a government-backed retirement fund. A pension plan is a retirement plan run by employers and governments. Pension funds operate much like annuities. Provident funds operate like a mix of Social Security and 401(k)s.
Is a pension fund the same as a provident fund? ›
In the past, pension and provident funds differed significantly in their retirement payout rules and tax treatment. Pension funds required members to annuitise most of their balance, while provident funds allowed full cash withdrawals. But as of March 1, 2021, the two are more closely aligned.
What is the difference between employee provident fund and employee pension scheme? ›
The major difference between EPF and EPS as saving schemes is that in EPF, both the employer and employee contribute a part of the employee's salary, whereas in EPS, only the employer contributes and the employee does not.
Is provident fund good or bad? ›
The Public Provident Fund (PPF), Employees' Provident Fund (EPF), fixed deposits (FDs), recurring deposits (RDs), senior citizens' savings schemes (SCSS), and post office deposits are reliable and tax-efficient choices. They provide compounded interest and are government-backed, ensuring they are low-risk investments.
Can I withdraw my provident fund while working? ›
No, this is not permitted - you can only withdraw when you leave your employer (on resignation, dismissal, retrenchment).
What exactly is provident fund? ›
A provident fund is a government-managed retirement savings plan that helps employees prepare for retirement. Employees and their employers contribute to the plan.
What are the disadvantages of provident fund? ›
Liquidity: Despite the return the risk and tax benefits are one drawback of the Provident Fund is the lack of liquidity with regards to access to these funds. Money that you invest in Provident Fund cannot be withdrawn until you're unemployed for 2 months or until retirement.
How long does a provident fund take to pay out? ›
For your provident fund payout, the timeline depends on the administrator's efficiency and dedication. Assuming your tax affairs are in order, with 10X you can typically expect a provident fund pay-out within 14 to 21 business days once all necessary documents are in order and contributions are invested.
Do you get a provident fund if you resign? ›
If you resign, or you are retrenched, you are allowed to withdraw from your employer-sponsored retirement fund (that is a pension or provident fund). The "benefit" you can claim is the balance in your retirement account. Once you have withdrawn, you have no other claim against that fund.
How much is a provident fund? ›
The “Provident Fund Act” allows the employer to determine employee's contributions rate into the fund between 2% to 15% deducted from employee's monthly salary. Thus, the employer's contribution will depend on the fund scheme set by the employer.
What is the rule for PF contribution? A monthly salary contribution of 12% is made to the Employee Provident Fund (EPF) by both the employee and the employer. Employees are not obligated to match employer contributions of up to 12% of their income, although they are able to do so voluntarily.
Is provident fund liability or income? ›
Contribution to 12% of salary is exempt, above that is added to salary income of the employee. Any interest over and above 9.5% is added to Income from Salaries.
How much should provident fund be? ›
Every month, an employee must contribute 12% of their basic and dearness allowance to EPF. The employer contributes the same amount and matches this payment. Out of the 12%, 8.33% is directed towards Employee Pension Scheme and 3.67% to EPF.
Can I withdraw my PF while working? ›
Unlike a bank account, you cannot withdraw funds from your EPF account while employed. EPF is designed for long-term retirement savings, and withdrawals are only allowed after retirement.
Can I cash out my pension fund? ›
If you retire, you can only cash out up to one-third, and the balance must be used to purchase an annuity. If you withdraw (when you find a new job and resign, or are retrenched), you could typically transfer as much of your funds as possible to a preservation fund at a registered financial services provider.
How much money can be withdrawn from provident fund? ›
Withdrawal Limits: According to the updated regulations, PF account holders can withdraw an amount equivalent to three months of their basic salary plus dearness allowance or 75% of the net balance in their EPF account, opting for the lower of the two.
What type of fund is a pension fund? ›
Pension funds typically aggregate large sums of money to be invested into the capital markets, such as stock and bond markets, to generate profit (returns). A pension fund represents an institutional investor and invests large pools of money into private and public companies.
What is a pension fund? ›
A pension fund is established by an employer based on the contributions made by the employer and employees. The objective of this common asset pool is to provide pensions for employees at the time of their retirement based on the growth of funds.
What is a provident pension? ›
Pension Fund. Provident fund means a scheme for the payment of lump sums and other similar benefits to employees when they leave employment or to the dependants of employees on the death of those employees.
Is a pension considered a retirement fund? ›
A pension plan is a retirement plan that requires an employer to make contributions to a pool of funds set aside for a worker's future benefit.
