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. Retirement Planning

    The process of determining retirement income goals and the actions ...
  6. 401(k) Plan

    A qualified plan established by employers to which eligible employees ...
Related Articles
  1. Sovereign Wealth Funds - Friend Or Foe?
    Investing Basics

    Sovereign Wealth Funds - Friend Or Foe?

  2. Roth Feature Boosts Benefits For 401(k) ...
    Retirement

    Roth Feature Boosts Benefits For 401(k) ...

  3. An Introduction To Sovereign Wealth ...
    Mutual Funds & ETFs

    An Introduction To Sovereign Wealth ...

  4. Should Your 401(k) Be In An Annuity?
    Savings

    Should Your 401(k) Be In An Annuity?

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center