Provident Fund

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Retirement Income Fund - RIF

    A group of investment products available to anyone as a conservative ...
  2. Locked-In Retirement Account - ...

    A type of registered retirement savings alternative that locks ...
  3. Double Advantage Safe Harbor 4 ...

    An employer-sponsored retirement plan, that combines the benefits ...
  4. 401(a) Plan

    A money-purchase retirement savings plan that is set up by an ...
  5. SBO-401(k)

    A tax-deferred, government-registered retirement savings plan ...
  6. Sovereign Wealth Fund - SWF

    Pools of money derived from a country's reserves, which are set ...
RELATED FAQS
  1. What are the financial benefits of retiring in the Philippines?

    Of those countries considered friendly to the United States, the Philippines has one of the lowest standards of living and ... Read Full Answer >>
  2. How can I get a 'pensionado' visa to retire in Costa Rica?

    The first and primary criteria necessary to obtain a pensionado visa in Costa Rica is that you must have a pension or pension-like ... Read Full Answer >>
  3. What option strategies can I use to earn additional income when investing in the ...

    A risk-averse investor should build his retirement portfolio by putting together a well-diversified portfolio and then regularly ... Read Full Answer >>
  4. How do you mediate a dispute between primary and contingent beneficiaries of a trust?

    There may be a dispute between beneficiaries whenever the proceeds of a trust or other transfer on death (TOD) account are ... Read Full Answer >>
  5. Should I invest in penny stocks or large cap stocks for my retirement portfolio?

    Large-cap stocks are a superior investment option for retirement portfolios compared to penny stocks. Most penny stocks are ... Read Full Answer >>
  6. What is fiduciary liability insurance, and what are its benefits?

    Under the Employee Retirement Income Security Act (ERISA), any individual who manages a employee benefit or pension plan ... Read Full Answer >>
Related Articles
  1. Investing Basics

    Sovereign Wealth Funds - Friend Or Foe?

    With $5.86 trillion in assets as of September 2013, SWFs have a great deal of clout in financial markets. But as the majority of SWFs are located in the Middle East and Asia, whether these largely ...
  2. Retirement

    Roth Feature Boosts Benefits For 401(k) And 403(b) Plans

    Roth accounts tend to beat Traditional plans over the long term by providing tax savings.
  3. Mutual Funds & ETFs

    An Introduction To Sovereign Wealth Funds

    Countries use sovereign wealth funds to stabilize their economies, but these investments can lack transparency.
  4. Savings

    Should Your 401(k) Be In An Annuity?

    Housing your retirement plan inside a variable annuity contract offers some big advantages, but only if you are close to retirement.
  5. Retirement

    SIMPLE IRA Vs SIMPLE 401(k) Plans

    See the differences that may cause an employer to choose one plan over the other.
  6. Retirement

    Roth 401(k), 403(b): Which Is Right For You?

    Learn how to decide between a 401(k), 403(b) or Roth to help you build your nest egg.
  7. Retirement

    Introduction To SIMPLE 401(k) Plans

    Learn about the features and benefits of the plan that is a cross between a SIMPLE IRA and a traditional 401(k) plan.
  8. Retirement

    An Introduction To The Roth 401(k)

    The money that you earn today is taxed today, making tax-free retirement withdrawals a reality.
  9. Options & Futures

    401(k) Debit Cards: Taking A Swipe At Your Retirement Savings

    This is just another more convenient way to borrow from your plan. But at what cost?
  10. Entrepreneurship

    401(k) Plans For The Small Business Owner

    If you own a business, this may be the plan for you! Find out about its benefits and eligibility requirements.

You May Also Like

Hot Definitions
  1. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  2. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  3. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  4. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
Trading Center