Preservation Fund FAQs
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What is a preservation fund?
This is a retirement fund designed specifically to invest the proceeds of your pension or provident fund. You may transfer your proceeds to such a fund in the event you are dismissed, retrenched, or you resign. This preserves both your retirement investment and the tax benefits. The transfer is not taxed provided you move your savings from a pension fund to pension preservation, or from a provident fund to provident preservation. You cannot, however, make contributions to your preservation fund. Your investment will thus only grow in line with its investment return.
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Who should consider using a preservation fund?
You should consider a preservation fund when withdrawing from a pension or provident fund (due to resignation or retrenchment).
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What are the tax benefits of a preservation fund?
A preservation fund preserves your investment and the tax benefits of a pension or provident fund.
- Investment returns are tax free – there is no income tax or capital gains tax
- Benefits are taxed on a favourable basis – lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free (see details under “What is the tax on your preservation fund benefits?”)
You do not pay tax when you transfer to a preservation fund, provided you transfer from a provident fund to a provident preservation fund, or from a pension fund to a pension preservation fund.
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How many preservation funds can you join?
You can join multiple preservation funds (you may join a new fund every time you exit a pension or provident fund), but the tax benefit is determined in aggregate, not in respect of each individual fund. In other words, the tax-free lump sum portion may be claimed only once.
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When can you access your preservation fund?
You can make one partial (or full) cash withdrawal at any time before you retire.
You can retire from your preservation fund from age 55 onwards. For a pension preservation fund, you can take a maximum of 1/3rd of your investment as cash; with the balance you must purchase an approved compulsory annuity, which will pay you a pension for life. For a provident preservation fund, you can take the full investment as cash or you can choose to receive your investment partly in cash and to convert the balance into an approved compulsory annuity.
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How are your preservation fund benefits taxed?
Lump sum benefits are taxed on the following basis:
Tax Rate Withdrawal Lump Sum Retirement Lump sum 0% 0 – R22,500 0 – R315,000 18% R22,501 – R600,000 R315,001 – R630,000 27% R600,001 – R900,000 R630,001 – R945,000 36% R900,001+ R945,001+ Source: South African Revenue Service
Annuity payments are taxed as income, according to the personal income tax tables.
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Can you contribute to a preservation fund?
No. You can only transfer your proceeds from a pension, provident or preservation fund to a preservation fund.
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Won’t you pay penalties when transferring your preservation fund?
We are not aware of companies that levy penalties when transferring a Preservation Fund. These penalties are more common with RA’s and represent a claw back of unrecoverable broker commissions and costs. This should not, however, be a factor in your decision to transfer your investment as your existing fund will deduct these unrecoverable commissions and costs anyway, either now when you transfer or in the future.
At 10X, we do not pay broker commissions as we do not use brokers. You therefore do not incur any “penalties” if you transfer your 10X Preservation Fund.
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Can you transfer your preservation fund?
Yes, you can transfer your preservation fund tax free:
- Between pension preservation funds
- Between provident preservation funds
- From a pension preservation fund to a pension fund
- From a provident preservation fund to a provident or pension fund
- To an RA
You will pay tax if you transfer your pension preservation fund to a provident fund
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What happens in event of the member’s death?
In line with section 37 of the Pension Funds Act, the trustees of the fund will distribute the proceeds, considering first the needs of your dependents and then the beneficiaries listed in your nomination form. It is thus important to fill in and update your nomination form annually. Your investment will be taxed on the same basis as on retirement.
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Can you cede your preservation fund?
No.
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How do you join a 10X Preservation Fund?
When you withdraw from your current retirement fund (either a company fund or another preservation fund), you must complete a withdrawal form, indicating that you wish to transfer your investment to the 10X Preservation Pension/Provident Fund. This form has to be signed and sent to HR (for a company fund) or to the fund administrator (for a preservation fund). Thereafter, request a 10X Preservation Fund Application Form, by e-mailing preservation@10X.co.za or calling us at 0861 109 109. Complete and sign the form and fax (0865 201 934) or e-mail it back to us, together with a copy of the withdrawal form. Ensure that you have completed the “Transfer Fund Details” section on the application form. We will contact the existing fund, action the transfer and confirm with you when completed.
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What is the minimum transfer to a 10X Preservation Fund?
The minimum amount you can transfer is R50 000.
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What is the cost of a 10X Preservation Fund?
See the 10X Fee
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What reports can you expect from the 10X Preservation Fund?
10X issues regular performance updates:
Benefit statements. These are published online monthly, and emailed to members quarterly. The information is presented in a clear and simple manner, to avoid confusion. Once a year, the Fund sends out a hard-copy benefit statement to every member.
Investment report. These are published online every month and details the investment returns of all life stage portfolios and asset class benchmarks (equities, bonds, property and cash).
Investor portal. This portal gives you access to all your plan details.
October 25, 2011 at 7:48 pm, Violet said:
Preservation fund withdrawals
What do I do to access funds in a preservation fund?
October 26, 2011 at 10:30 am, 10X Investments said:
Violet,
The Income Tax Act allows you to make one full or partial withdrawal from your Preservation Fund prior to retirement. To do so, you must complete a Preservation Fund withdrawal form. The applicable tax rates for a withdrawal are as per the table below. These rates are higher than at retirement (earliest age 55). On retirement, you receive the first R315 000 tax-free.
It usually takes two weeks for the money to be paid out, provided your tax affairs are in order.
The reason for the higher tax rate on withdrawal is to discourage you spending your retirement savings early. It is important you appreciate the negative consequences of “tapping” into your retirement savings ahead of time: you end up losing not only your savings but also the return you would have earned on those savings over the remainder of your working life. Say you plan to work another 25 years, the compound return (in after-inflation terms, ie in today’s money) can more than triple the amount that you plan to withdraw. So for every R10,000 that you withdraw, R30 000 would be missing from your final nest egg (again, in today’s money terms). This will make it very difficult to achieve your retirement goal, which is to save enough money, to maintain your standard of living in retirement.
January 31, 2012 at 8:23 am, Brian Tucker said:
Transferring a preservation fund to an annuity
1. I have about R6.5m in a high cost Pension Preservation Fund I want to transfer to either a low cost fund or a living annuity. I am 66 years old and retired.
2. Can I somehow transfer 50% of the fund to my wife without getting divorced?
3. How can I minimise the tax on the fund when I die while still retaining some flexibility.
4. What are the advantages and disadvantages of the preservation fund vs a living annuity. I do not need income at the moment.
Please reply by email as I am a bit deaf. Please inform me and get an order number if there are any costs involved in answering these questions
Brian
February 01, 2012 at 11:32 am, 10X Investments said:
Brian,
We are not authorised to give financial advice, and can therefore only explain your options to you. There are numerous permutations with different consequences, depending on what has gone before. A financial consult will be able to explain these to you in more detail.
In summary, these are your options:
1. You can transfer your present preservation fund to another (low cost) preservation fund free of tax.
2. You can reset your normal retirement age for the preservation fund to say 70, and then withdraw from the preservation fund. This will be taxed as a withdrawal lump sum, with the first R22 500 taxed at 0%, the balance to R600 000 at 18%, the balance to R900 000 at 27%, and the rest at 36%.
3. You are allowed one withdrawal from your preservation fund for each individual transfer from a pension fund into that preservation fund.
4. You can also transfer your pension preservation fund to a RA, resetting your normal retirement age to say 70.
5. You can cash in up to one third of your preservation fund; with the balance you must buy an annuity (either guaranteed or living). The one third lump sum will be taxed at favourable rates (first 315,000 at 0%, second R315 000 at 18%, third R315 000 at 27%, balance at 36%). Any transfer to a living annuity will not be taxed.
Depending on your withdrawal history, you may be able to withdraw 50% or more out of the fund, pay the lump sum tax, and transfer the balance to your wife, free of donations tax.
A living annuity permits flexibility and minimise tax. The living annuity will enable you to choose your own portfolio, and it will also allow you to choose how much you wish to withdraw every year. Presently, the minimum is 2.5% pa, but under proposed legislation (which will also change the name of living annuities to RIDDA’s [retirement income draw-down account], the minimum will be 0%. It is expected that RIDDA’s will be included in a Bill to be released during this year.
If you do not draw down on your living annuity (as you do not need income at the moment), you will not pay tax on it until you do.
On your death, the living annuity will typically not fall into your estate (unless no one claims it), but will go to your financial dependents and nominated beneficiaries. The living annuity will then only be taxed in the hands of the recipients (who can elect to receive the outstanding balance as a lump sum or as an annuity, or as a combination of the two).
Advantages and disadvantages: You cannot make annual withdrawals from a preservation fund, but if you do not need income for now then that does not matter. Traditional living annuities can be very expensive (transfer fee plus annual fee), and staying with a low-cost preservation fund would thus also be more advantageous. Tax consequences on your death are the same. A living annuity is probably more flexible, to invest the money as you wish.
January 18, 2012 at 8:28 am, Bruce said:
Pension fund 101
i would like to know what’s the dIfference is between a provident, pension, preservation fund and RA
January 18, 2012 at 10:16 am, 10X Investments said:
Bruce,
All are retirement funds governed by the Pension Funds Act, but they serve different needs and purposes.
Pension and provident funds are so-called workplace funds. If you become employed by a company that offers one of these funds, and you are eligible to join, then you must join this fund. It must be a condition of your employment.
The purpose of a pension fund is to pay you a pension in retirement. You must therefore convert at least two-thirds of your pension fund into an annuity that will pay you a regular income for the rest of your life. You can take the other one-third as a cash lump sum. Under present law, the employer may claim a 20% deduction iro your pensionable income and you may contribute and claim a further 7.5% of your pensionable income
The purpose of a provident fund is to pay you a cash lump sum at retirement (although you can also convert it to annuity if you wish). Under present law, the employer may claim a 20% deduction iro your pensionable income. You may not claim a deduction.
A preservation fund enables you to preserve your pension/provident fund savings and your retirement fund tax advantages when you change jobs and don’t cash in your pension/provident fund. You cannot contribute to a preservation fund however. At retirement, the same distinction as between a pension and a provident fund applies.
A RA is a retirement fund for individuals who are self-employed, or whose employer does not offer a work place fund. Presently, you can claim a contribution of 15% of non-pensionable income for tax purposes. A RA is similar to a pension fund in that you must use at least two-thirds of the fund to purchase an annuity when you retire. Unlike a pension/provident/preservation fund, you cannot cash in a RA before retirement (minimum age 55).
February 08, 2012 at 9:05 am, Khosi Zwane said:
Implications of withdrawals after transfers
How much can I withdraw after transfering a pension fund into a preservation fund, what are the implications thereof?
February 08, 2012 at 11:17 am, 10X Investments said:
Khosi,
The biggest implication is that you will have less money at retirement as you not only forgo your savings, but also the investment return you would have earned on those savings until retirement.
You are allowed to do the following with your preservation fund money:
1. Before you transfer your pension fund money to the preservation fund, you are allowed to make one (full or partial) withdrawal.
2. You are allowed one other (full or partial) withdrawal from your preservation fund. The balance (if any) must stay in the fund until you retire (earliest age 55).
This applies to every individual transfer to a preservation fund. So, in the event you have worked for two or more employees, each with their own retirement fund, and you haven chosen to preserve every time, then you can make one (full or partial) withdrawal in respect of every transfer into the preservation fund.
Your withdrawal will be taxed according to the withdrawal tax lump sum tables: the first R22 500 is not taxed; the balance to R600 000 is taxed at 18%, the balance to R900 000 at 27% and the rest at 36%. This tax tables work cumulatively, ie they do not apply to individual withdrawals, but build on past withdrawals.
The withdrawal cash lump sum tax rates are higher than the retirement cash lump sum tax rates, so you will also save tax by not claiming your money until you retire.
March 14, 2012 at 10:53 am, Cedric said:
Understanding preservation fund withdrawals
I just want to know if I understand withdrawals
correctly, I did withdraw before funds were transferred to the Preservation fund. I can make one last draw from fund, is this correct?
March 14, 2012 at 11:15 am, 10X Investments said:
Cedric,
You can make one partial or full withdrawal from your preservation fund for every transfer into the preservation fund. So if your fund holds the proceeds from two workplace retirement funds, you can, for example, withdraw the proceeds from the one fund in full, and then still have the option to withdraw the proceeds from the other fund at another time.
March 16, 2012 at 10:38 pm, Cedric said:
The rules of preservation fund withdrawal
Why do you say to Khosi,
1. You can withdraw funds before you transfer to a preservation fund and,
2. You are allowed one other(2nd) withdrawal from preservation fund.
Or do I have my wires crossed?
March 19, 2012 at 10:05 am, 10X Investments said:
Cedric,
Previously, investors could either withdraw entirely from their pension/provident fund on resignation/retrenchment or they could transfer all their funds to a preservation fund, and then, at some stage, make one full or partial withdrawal.
The new rules now permit members to forward only part of their retirement fund proceeds to a preservation fund (ie withdraw the other part). They are then still allowed to make one full or partial withdrawal from the preservation fund. Effectively, they can now dip into their pot twice before retirement.
March 14, 2012 at 11:10 am, David said:
Preservation fund advantages
What are the advantages of investing in a preservation fund?
March 14, 2012 at 11:37 am, 10X Investments said:
David,
A preservation fund preserves not only you retirement savings, but also the attached tax benefits. You can transfer a provident fund to a provident or pension preservation fund, or a pension fund to a pension preservation fund. The transfer will not attract tax, the investment income earned by the preservation fund is not taxed, and on retirement, any lump sums you take are taxed according to the retirement rather than the (less favourable) withdrawal lump sum tax tables.
Preservation funds are flexible in that you can make one full or partial withdrawal for every transfer into the preservation fund (although the intention is to preserve your money until retirement!). The one draw-back is that you cannot contribute to a preservation fund.
Not all preservation funds are created equal. Ensure that the underlying investment costs, investment style, asset allocation strategy and reporting transparency meets your needs. Avoid paying entry fees and commissions if at all possible. If you are joining a new employer’s workplace fund, and you are not sure whether you should transfer your proceeds to that fund or not, then compare the two funds on the above set of principles. Do not subject your lifetime savings to unnecessary or high costs, as it can ruin your retirement.
March 24, 2012 at 5:49 pm, Idalette Strydom said:
How to invest in a preservation fund
I have investments which I can withdraw to invest in the 10x Preservation Fund. Can this be done. I never had a pension. My husband died and I have the proceeds from his estate
March 26, 2012 at 9:25 am, 10X Investments said:
Idalette,
A preservation fund is a type of retirement fund that enables employees to preserve their retirement savings (and attached tax benefits) in the event they leave their employer.
The following is possible:
- you can transfer provident fund (or provident preservation fund) savings to a(nother) provident or a pension preservation fund, or to an RA.
- you can transfer pension (or pension preservation) fund savings to a(nother) pension preservation fund or to an RA.
- You can transfer RA savings to another RA
If your assets (the proceeds from your husband’s estate) are not presently within a pension or provident fund structure, it will not be possible to transfer these to a (10X) preservation fund. However, if you like our simple, low cost solution, and you wish to avoid paying tax on your investment income, you do have the option to transfer these assets into the 10X RA. The 10X RA has the identical asset allocation and low fee structure as the 10X Preservation Funds.
Note that the following would happen when you retire from that RA (earliest age 55): you may claim one-third of the fund balance as a cash lump sum, you must use at least two-thirds of the fund balance to purchase an annuity. The cash lump sum is taxed at favourable rates, with the first R315 000 tax free, the second R315 000 taxed at 18%, the third R315 000 at 27% and the balance at 36%. The amount you initially contributed to the RA (to the extent that you did not claim any tax against it) is added to the tax-free portion of the cash lump sum. This ensures that you are not taxed on your own capital contribution.
March 30, 2012 at 12:10 pm, Bob said:
Can you transfer your provident fund to a government savings bond?
CAN I TRANSFER AN R A AND PROVIDENT FUND TO A GOVERNMENT SAVINGS BOND?
March 30, 2012 at 1:39 pm, 10X Investments said:
Bob,
You can only access your RA at retirement (earliest age 55). When you do, you have the option to commute one third of your investment balance into cash. At that point, you can use that cash to purchase a government savings bond. Your RA may give you the option to switch funds, and you could then consider allocating some of your savings to a bond fund, as an alternative. The advantage of an RA (rather than saving privately) is that the interest on the bond fund is not taxed whereas the interest on a government savings bond (or retail bond) held privately is taxed.
You can access your provident at retirement (earliest age 55) or when you leave your employer. Until then your fund manager will manage the money on your behalf. If you have a degree of investment choice, you can again allocate part of your money to a bond fund.
Retail bonds are designed primarily for investors saving in their own name (as a post-retirement option, for example). It is typically more tax efficient to save through a retirement fund. Be aware that the real (after-inflation) return from retail bonds is not that high. If you have a long investment time horizon (ie you are many years away from retirement), you should emphasise asset classes that have habitually delivered a higher real return over time (ie equities). Overweighting lower risk, lower yielding assets such as bonds is more appropriate for investors near retirement, who wish to preserve the value of their savings.
April 10, 2012 at 5:50 pm, Jeffrey said:
Can you transfer funds from your pension fund to a preservation fund?
Can you make a withdrawal from a pension fund and transfer it to a preservation fund?
April 11, 2012 at 10:47 am, 10X Investments said:
Jeffrey,
You can withdraw from a pension fund when you leave your employer, and transfer that money tax free to a pension preservation fund. However, you cannot arbitrarily make a partial withdrawal from a pension fund while still remaining a member of that fund (ie continuing to be employed by the sponsoring company – your employer – and contributing to that fund). You are not permitted to access these retirement savings while you remain with your current employer, and you cannot circumvent this rule by first moving the money to a preservation fund (which does allow one full or partial withdrawal before retirement).
April 20, 2012 at 11:44 am, Karin said:
Can you make more than one withdrawal from your preservation fund?
Hi, can you make another withdrawal from your pension preservation fund if you transfer the fund to another pension preservation fund
April 20, 2012 at 12:09 pm, 10X Investments said:
Karin,
No, one withdrawal is all you get before retirement (earliest age 55), even if you transfer your fund. National Treasury is quite particular about enforcing this rule; therefore you are also not permitted to split your retirement fund savings among different preservation funds, as this would also enable you to get around the “one withdrawal” rule.
April 21, 2012 at 8:31 am, Mandy said:
Can you withdraw form your preservation fund after age 56?
Can I witdraw from my pension preservation fund after 56
April 23, 2012 at 9:43 am, 10X Investments said:
Mandy,
You can make one full or partial withdrawal from your pension preservation fund at any age. You may retire from your preservation fund (ie claim the balance of your fund) from age 55 onwards. The lump sum tax rates on retirement are more favourable that those on withdrawal, but with “retirement” you are also required to use two-thirds of your pension preservation fund to purchase an annuity. With a “withdrawal”, you can choose to take the entire amount as cash.