Difference Between Provident Fund and Pension

Definition of Provident Fund

A provident fund is a government-run retirement fund. They are generally mandatory, and are funded by both employer and employee contributions. The rules governing withdrawals are set by governments, including the minimum age and withdrawal amount. If a participant dies, his or her surviving spouse and dependents may be able to receive payments indefinitely. Unlike the United States’ Social Security system, workers in provident funds frequently only contribute to their own retirement account, rather than a group account, so a provident fund is similar to a 401(k) account in this regard. The key difference is that in a 401(k) account, the account holder makes the investment decisions, whereas the government makes the investment decisions in a provident fund.

Members of provident funds can take out a portion of their retirement benefits in a lump sum, typically one-third or one-fourth. The remaining benefits are paid out in monthly installments. The tax treatment of lump-sum withdrawals varies by region, but only a portion of a provident fund’s lump-sum withdrawals are usually tax-free. Pension fund distributions are taxed.

To summarize, the Provident Fund is a government-sponsored retirement benefits program. Both the employer and the employee are required to contribute to this fund. When the time comes for you to retire, this fund will have amassed a sizable sum. The government establishes the rules that govern the provident fund scheme, such as minimum age requirements and withdrawal limits.

Definition of Pension

A pension plan is a type of retirement plan in which an employer, as well as employees, contribute to a pool of funds set aside for the workers’ future benefit. The funds are invested on behalf of the employees, and the earnings from the investments help fund the workers’ retirement lives. A pension fund, unlike a provident fund, is typically managed by an employer rather than the government.

Individual participants in some pension funds may be able to choose their investments and contribution amounts, whereas most provident funds have mandatory contributions and investments that are managed centrally. In contrast to Social Security, some provident fund accounts are held in individual names rather than being pooled into a single trust fund account.

Members of a pension fund can take as much of their benefits as they want in a lump sum when they retire, though monthly payments are more common.

In some ways, the benefits of a pension fund are similar to an annuity, whereas the benefits of a provident fund provide significantly more payout flexibility. The other significant distinction is that all provident fund contributions are mandatory.

To summarize, a pension fund is a type of retirement planning scheme that is funded by both employers and employees. Pension funds are set aside to provide income to employees after they retire. However, in most cases, it has traditionally been up to the employer.


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