Provident Fund


DEFINITION of 'Provident Fund'

A compulsory, government-managed retirement savings scheme used in India, Hong Kong, Singapore, Malaysia, Mexico and other countries that is similar to the United States’ Social Security program. It is run by a government for the benefit of its citizens. A provident fund is a form of social safety net into which workers must contribute a portion of their salaries and employers must contribute on behalf of their workers. The money in the fund is then paid out to retirees, or in some cases to the disabled who cannot work.

BREAKING DOWN 'Provident Fund'

Provident fund specifics vary widely by country, but in general their purpose is to provide financial support for those who meet the plan’s defined retirement age. Governments set the age limit at which withdrawals are allowed to begin (penalty-free), though some pre-retirement withdrawals may be allowed under special circumstances, such as for medical emergencies. In Swaziland, for example, provident fund benefits can be claimed as early as age 45. Each provident fund sets its own minimum contribution level for workers and employers, which may vary depending on the worker’s age. Some funds allow individuals to contribute extra to their benefit accounts and allow employers to contribute extra for their employees.

If a worker dies before receiving benefits, his or her surviving spouse and children may be able to receive survivors' benefits from the provident fund. Some countries also allow individuals to receive an early payout if they emigrate to another country. Those who work past the minimum retirement age may face restricted withdrawals until full retirement.

Unlike U.S. Social Security, some countries’ provident fund accounts are held in individual members’ names. Instead of younger workers paying into a communal account, individuals get back the money they contributed to their own accounts plus interest or investment returns. In this regard, a provident fund resembles the U.S. concept of a 401(k), except that the money in provident funds is held by the government, not by a private financial institution. Also, the government, or a provident fund board - not the workers - largely or entirely chooses how provident fund contributions are invested. Some countries, such as Singapore, guarantee workers a minimum return on their provident fund contributions.

While the use of private savings accounts have grown in popularity, publicly administered retirement accounts remain important in both developing and developed economies. Societies in the developing world, for example, are still catching up with the rapid rise in industrialization, movement of citizens to urban areas from rural ones and changing family structures. In traditional Asian societies, for example, the elderly were provided for by their extended families. Declining birth rates, widely dispersed families and longer life expectancies have made maintaining this extended safety net difficult, and governments have stepped in to provide long term financial planning.

Provident funds are different than sovereign wealth funds, which are funded through royalties obtained from the development of natural resources.

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  1. What types of investments are allowed in a provident fund?

    Different provident funds have different investment rules and restrictions. The allowable investments in an Indian provident ... Read Full Answer >>
  2. How are benefits from a provident fund taxed?

    Not all provident fund benefits are treated equally, even in the same country. Thailand, for instance, has three separate ... Read Full Answer >>
  3. How is the provident fund funded?

    A provident fund is a type of government-sponsored social welfare program used in many countries to ensure that retirees ... Read Full Answer >>
  4. Are catch-up contributions included in the 415 limit?

    Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
  5. Can catch-up contributions be matched?

    Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
  6. Are catch-up contributions included in actual deferral percentage (ADP) testing?

    Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>

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