Preservation fund decisions: Why short-term thinking can cost you

The uncomfortable truth about retirement in South Africa - Rands and Sense by 10X [video]

We sit down with 10X Investment Consultant lead Andre Tuck and discuss the retirement savings crisis in South Africa. We also delve into living annuities, retirement annuities, TFSAs and everything in between. Read more

It’s easy to get tempted to withdraw from your savings when leaving a job and using a preservation fund. Focusing on your immediate financial needs rather than your long-term financial future can be compelling. Keep in mind, however, that a decision to withdraw from your hard-earned savings can have long-term consequences for your retirement outcomes. Instead, investing all of your savings in a preservation fund and avoiding withdrawals can help you build and grow your capital over the long term and improve your retirement outcomes. In this article, we will take an in-depth look at the benefits of keeping your money invested and avoiding withdrawals, as well as the potential long-term benefits of this approach.

Understanding preservation funds

A preservation fund is a way to continue potentially growing and compounding your money from an employer-sponsored pension or provident fund when you change jobs. It is a long-term retirement savings vehicle that allows you to transfer your savings into it without triggering any tax liability. Your pension fund will need to be transferred to a pension preservation fund, and your provident fund to a provident preservation fund.

All growth in your preservation fund will also be tax-free, meaning more capital will be available to grow over time. You aren’t able to make any further contributions to your preservation fund, so this should be taken into account in your planning. From age 55, you will be able to retire from your preservation fund, and these savings can then be used for an annuity, though many choose to continue to work for much longer. Your annuity (either a life annuity or living annuity) will provide you with an income for the retirement years.

Why investors make short-term decisions

There may be a variety of reasons why you may make decisions that are more focused on the short term and which don’t factor in the long term. Let’s have a look in more detail:

• Financial pressure: You may need to cover living expenses, pay off debt, or bridge a gap between jobs. In these situations, accessing retirement savings can seem like an easy solution.
• Prioritising immediate needs over future goals: Retirement can feel like a distant concern, making it easy to focus on present-day priorities rather than the long-term impact of withdrawing savings.
• Underestimating the value of compound growth: The long-term growth potential of invested retirement savings is often not immediately visible. As a result, investors may focus on the amount available today rather than the potentially much larger amount it could grow into over time.
• Emotional decision-making: Major life changes, such as changing jobs, can lead to decisions being driven by emotion rather than careful planning. As such, this can increase the chances of actions that may negatively impact long-term retirement outcomes.

It can be easy to focus on the short-term needs, but these shouldn’t overshadow your long-term financial goals and plans, even if these may seem like a long way off. A short-term financial benefit today could come at the expense of significantly reduced retirement savings in the future.

The hidden cost of withdrawing early

There are some important costs to consider if you are thinking about withdrawing cash early. You should always consider the tax implications; if you decide to withdraw your savings before age 55, the withdrawal will be taxed according to the SARS lump-sum tax tables. These are as follows, as taken from the SARS website:

On the other hand, if you keep your savings invested, not only do you avoid paying more in tax, but you are also able to take advantage of the potential compound growth that may occur over time. If you wait until after age 55, your cash withdrawal will be taxed under the retirement lump-sum tax tables. This allows for the first R550,000 to be tax-free. Please see below the retirement lump sum tax tables, as taken from the SARS website:

The impact of the Two-Pot Retirement System

The Two-Pot Retirement System was implemented in September 2024. This new system affects retirement products in South Africa and has changed how contributions and withdrawals are treated. All contributions to retirement products will now be split between two ‘pots’. These two pots are, namely, the ‘retirement pot’ and the ‘savings pot’. There is also a third pot, called the “vested pot”, that is for contributions made before the new legislation and remains governed by the old rules.

Two-thirds of contributions will be allocated to the retirement portion, and one-third will be allocated to the savings portion. Unlike retirement annuities, preservation funds don’t allow for additional contributions after the initial transfer. As a result, the contribution-splitting rules do not apply in the same way as they do to products that receive ongoing contributions. Instead, the savings component of the preservation fund will grow at the same rate as the total fund.

Let’s consider this example: If the total fund grows by double its size, then you will see that both the savings pot and the vested pot will also grow by double their size. As such, both portions benefit from investment growth generated by the fund.

Please consult the latest FSCA guidance on the Two-Pot Retirement System.

Why asset allocation matters for long-term preservation

Your asset allocation can be a key factor in the long-term growth of your capital. This is especially important for preservation funds, as you cannot make further contributions. Therefore, you rely on investment returns to grow your invested capital. Asset allocation plays the biggest role in the performance of your preservation fund, accounting for over 90% of returns, as seminal research from Brinson, Singer and Beebower shows.

You would select your asset allocation from the four asset classes: equities, real estate, bonds, and cash. 10X makes things easier by giving you access to a range of carefully curated investment funds, each with a different mix of assets and geared towards different investor profiles.

Cash is the most liquid and stable of the asset classes, but it is also likely to yield the lowest returns. Bonds will also add some stability to your portfolio while generating lower returns. Real estate may be a good hedge against inflation and may also produce some strong returns. Equities are the most volatile of the asset classes, but they are also likely to produce the best returns over time, which could be essential to the potential growth of your capital. As data suggest, equities have historically produced returns above inflation by around 7% annually, over the long term (based on JSE All Share Index performance versus CPI from 1960-2020), although past performance does not guarantee future results.

You may also wish to consider diversifying your portfolio offshore. This may be a good hedge against instability in the local market and any subsequent depreciation of the Rand. You will need to ensure you comply with Regulation 28 of the Pension Funds Act. This stipulates that you may invest up to 45% offshore and up to 75% in equities.

At 10X, you are able to choose from a range of well-diversified, Regulation-28-compliant funds offering you access to a range of different asset classes. This diversification allows you to balance both risk and reward. Please explore our funds page for the most up-to-date fund information. Fund information is correct as of 22 June 2026.

Why fees matter when preserving retirement savings

When you look at the fees you are being charged, it’s important that you view these fees in the long-term context. Although the fees you are being charged may seem small, when compounded over time, they can have a significant impact on the potential growth of your preservation fund.

Fees may also reduce the available returns that you have to reinvest and grow your capital over time. If your fees are lower, these may then result in more returns available to compound and potentially grow over the long term. The Effective Annual Cost (EAC) is a standardised metric which was introduced by ASISA in 2015. This metric allows you to view the fees and costs that are associated with owning an investment product over a one-year period of time. You can then use this information to compare and evaluate different service providers.

All else being equal, you may find that a higher EAC means that there are fewer returns to be reinvested and allowed to compound over time. A lower EAC may result in more returns being available for reinvestment and compounding over time. The EAC of your investment would be just one factor to consider when evaluating service providers. At 10X, we offer clients a free EAC calculator, which is a part of our online suite of tools that is available to clients on our website. This can be useful to evaluate the fees that you are being charged with those of other service providers.

Let’s look at an example to illustrate the impact of fees. We will assume the following information for our example:

• Investment period of 30 years
• Investment of R150,000
• Return of 12% per annum
• An inflation rate of 6% Example 1 (1% Fees): Real investment value is approximately R598,000.
• Example 2 (3% Fees): Real investment value is approximately R347,000.

A difference in fees of just 2% can have a potential impact on the investment value of your preservation fund, especially when compounded over time. This example is for illustrative purposes only, and actual results may vary. You can discover more about how fees impact retirement outcomes here.

You may see a few different types of fees deducted from your preservation fund. Let’s have a look at some of these fees:

• Management fees: These are the fees charged for the management of the fund.
• Administration fees: There will also be administration fees for tasks such as compliance, reporting, tax and similar.
• Advisor fees: An advisor will charge fees for advice and other services. You may see both an initial and an ongoing fee charged.

Fees at 10X are transparent, low cost and simple, allowing you to be clear on where you stand with regards to the fees that you are paying. Fees on retirement products are usually 1% or less, depending on the product selected and the amount invested. Please explore our products for the most up-to-date fee information. Fee information is correct as of 22 June 2026. H2: Common mistakes investors make There are a few common mistakes that investors may make when it comes to their preservation fund. Let’s have a look at some of these mistakes:

• Withdrawing cash and not keeping capital invested: By keeping the savings invested, this will allow for more potential growth over time.
• Withdrawing savings for short-term, non-essential items: Instead, your savings should remain invested in order to potentially compound and build over the long term. The more you leave invested, the greater the potential for improved retirement outcomes.
• Not considering fees: It’s vital that fees are reviewed to ensure that you are aware of the fees that you are paying. Low fees mean more of your savings can be reinvested and potentially compound over time.
• Being too conservative with your asset allocation: It’s important to include growth assets in your underlying portfolio to aim for growth. This should align with your investor profile and long-term financial goals.
• Not reviewing your preservation fund: Generally, you should look to review your preservation fund once per year to ensure it is still aligned with your investor profile and personal circumstances.

Questions to ask yourself before making a withdrawal

There are a few important questions to consider before withdrawing money. Let’s have a look at some of these questions:

1. Is this withdrawal imperative?
2. Do you have other sources of capital that you could access instead of using your hard-earned savings?
3. Have you considered the tax that you will be liable to pay if you do withdraw this money?
4. What will be the long-term considerations of withdrawing money? What will the impact of this be on your retirement outcomes?
5. What will the outcome be if you instead delay the withdrawal until your retirement years?

When you consider withdrawing your preservation fund savings, it’s important that you also consider the long-term consequences of your potential withdrawal.

Final thoughts on preservation funds

A preservation fund is a long-term retirement savings vehicle designed to help you save for retirement. By using these savings for the short term, you could be impacting your retirement years and outcomes. A disciplined, consistent, and long-term approach to your savings that keeps your capital invested can set you on the right path to retirement.

The 10X investment consultants are experienced, skilled and here to assist you with planning your preservation fund and your retirement goals and objectives. Get in touch with us to help you plan and optimise your retirement!