Differences between Pension and Provident Fund

167

 

There is a slight difference between Provident and Pension Fund. These two are contributions by people for their retirement and are useful for young people who would like to save so as to live comfortably after retirement.

The difference between the two is as explained below.

Provident fund

In provident fund, an individual receives lump sum amount only once. This means that your perennial contribution accumulates to an amount that is paid once after it matures.

Though the full amount is paid once, one is allowed to purchase a compulsory annuity

Example

An individual can decide to make monthly contribution of $50 for the next 30 years. This amount will earn interest and accumulate to $1 million. After it matures, the person will be paid the $1 million or be advised to join a compulsory annuity, where the money will be paid in bits

Pension

After your retirement, you are entitled to your pension. When payments are made, you simply receive a portion of your total contributions in lump sum and then earn the remaining amount in bits for the rest of your life.

Example

If your total pension contribution is $10 million, you will earn, say 1/3 of the total amount in lump sum, then the remaining amount will be spread and given to you in bits.

From the two examples, you are advised to consider pension as opposed to provident fund. Saving for pension is the best option because the risk is minimized.

Loading...