Oops, wrong fund: How I changed jobs and made a disastrous mistake with my pension

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of 10X Investments.

A long time ago in a faraway land, a woman (again, let’s call her Nicola) had a job that came with a provident fund.

(Bear with me. This isn’t a fairy tale. It’s 100% real, and reading this might save you from making a terrible mistake with your pension or provident savings when you change jobs)

This was the first time she had this sort of investment – or any investment for that matter. Contributions were mandated as part of her employment contract, and contribute she did. Anyway, after a while she was headhunted (no, not by a wicked witch), and so she asked that the money be transferred to a preservation fund.

In fact, she was very specific that the money be transferred into a preservation fund, having spoken with someone who was wise about these things. Anyway, she trusted a lady called Penny to get this done, and felt good doing it. Penny: does the universal thumbs up come any clearer? Even so, the money ended up in an endowment fund – thanks, Penny – which is quite obviously a totally different kettle of fish. Let’s untangle this mess a bit.

What a preservation fund actually does

A preservation fund does exactly what the name says. It preserves your previous pension or provident fund savings in solid, well-priced fund (hopefully, if you’ve been savvy about which preservation fund you choose), and allows the magic of compounding to happen so that you end up with (hopefully a lot) more money in retirement. Transfers into a preservation fund are free and easy (again, if you’ve chosen the right provider), and they maintain your tax benefits.

This moolah is invested in instruments such as unit trusts, cash, property or equities, and that’s managed by the fund managers – people with abilities that are not in my particular skill set - which is rather the point. You maintain control over the fund you choose, and you get to choose the fees you pay, which is not the case were you to leave that money in your previous employers’ pension or provident fund.

Endowments, however, operate under a different set of rules, tax structures and constraints. They’re investments, so returns are taxed, unlike preservation funds where tax is deferred as part of the retirement system. Also, to get pension or provident fund money into an endowment, you usually have to cash it out in some form. And you probably don’t want to do that, as nice as a little windfall might be at that point. You definitely don’t want to do that if you want your retirement to be as comfortable as possible. That’s because cashing out sets your retirement savings back. A lot. More than you might think. Read more on why you shouldn’t do this here.

Honestly, I don’t really know how my money ended up in an endowment. Be vigilant with your money – weird things happen sometimes. For shame, Penny.

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Anyway, most people wouldn’t consider an endowment for pension or provident fund money. Apart from the above, the money is typically locked in for five years after which you can effectively drain the investment dry; apart from what the tax man and other people take. This really defeats the point if what you wanted was a simple way to preserve and grow your savings until it’s time to retire.

And, if that doesn’t take the cake, they often come with layered costs – including policy fees, underlying investment charges and adviser commissions – baked in. Preservation funds, however, generally come with underlying fund fees, sometimes an admin fee, and an advice fee if there’s a broker (although whether you need a broker to make these kinds of decisions is up for debate. Direct investment for the win – it can save you a lot of money).

And speaking of money, 10X is now charging 0.7% on their preservation fund, compared with the 1.5% to 3% you’ll typically see elsewhere. That’s worth a chat for sure.

It all came out in the wash, but I was

Fortunately for Nicola, the wise person she knew was able to get it all sorted out, with charges and taxes reversed, and now her money is in a preservation fund. This was around the time that Nicola decided to handle her own investments, thank you very much, and worked out her cost to company accordingly when changing jobs.

A lot of people may not have this luxury, especially when working for a big company, which is why it’s important to know that preservation funds can be a jolly good idea as an investment once you leave that company.

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After all, the money just sits there and grows nicely. And, while you are transitioning jobs – or careers – it makes sense to look ahead a little. When you get to where you are going, have a long, hard look at the returns you can expect if you leave that money in your previous employers fund. Aside from maybe making you more money, taking control of your investments just feels good. Then, and this is where street smarts comes in, ask about fees. And ask just how much of your future growth they will potentially eat up.

(Disclaimer: of course, returns can never be guaranteed, and if they were, it’s too good to be true and probably illegal. So while past performance is not indicative of future performance, it is useful benchmark. Go look.)

Fees will eat up your investment

Let’s take a hypothetical example of high fees based on Nicola. Assume I were to invest for the next two decades, because that is exactly what I should be doing. Now, let’s assume I’ve saved a million in my provident fund (which isn’t that much when you consider how old I am and how much value money loses over time). Another assumption is that I get 6% growth after fees and factoring in inflation.

At 0.7% in total costs, I’ll pay roughly R185k in fees over 20 years and end up with about R2.4 million.

If I pay the usual, around3% in fees, I’ll end up paying around R650k in fees for a final amount of around R1.6 million. Crikey, what a difference - because those fees compound over time, just not in my favour.

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More good things about a preservation fund

Another really nice thing about preservation funds is that you can move them. If you are, for example, invested with ABC and wanted to move to 10X (YZ), it’s doable. (See what I did there.) Section 14 transfers are free. And they should be. You should be able to choose where your money is invested!

Maybe whip out your current statement – or ask for one – and have a long, hard look at the fees. Or ask whoever at wherever to kindly detail them in a way that makes sense. Then decide what to do with your retirement savings. An important decision, all things considered.

Yes, there is paperwork involved in moving. And I hate paperwork. But it’s really not that onerous, and I’d do it all ten times over it meant getting peace of mind about my money. Emphasis on the my.

I want my money in the best possible place for me and my anticipated future circumstances. Like in the exceptionally unlikely event my book flops. And that, dear Penny, is why you won’t ever see another penny of mine.

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