Preservation fund mistakes to avoid

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A preservation fund is a retirement savings vehicle that is used to continue growing and compounding savings that were previously in a pension or provident fund. These savings can be transferred to a preservation fund without triggering a tax event when an employee changes jobs. If you have a provident fund, this needs to be transferred to a provident-preservation fund, and for a pension fund, the savings need to be transferred to a pension-preservation fund.  

The growth within your preservation fund is tax-free, meaning there are more returns available to potentially compound and grow over time. When managing your fund, there are some common mistakes that you should avoid, as these may hinder the long-term growth of your preservation fund over time. In this article, we will cover the common mistakes to avoid as an investor.  

Understanding the Two-Pot Retirement System 

Preservation funds are governed by the Two-Pot Retirement System, which was implemented by the National Treasury in September 2024. The structure of the Two-Pot Retirement System is such that contributions are split, with one-third going to the savings pot and two-thirds to the retirement pot. This, however, won’t affect preservation funds, as they are not able to receive further contributions.  

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The system also includes a vested component, which refers to all savings accumulated before the system’s introduction, that remains governed by the previous rules. Before the introduction of the Two-Pot system, you were entitled to one withdrawal from your preservation fund before retirement, so this rule will still apply to any capital within the vested pot.  

As preservation funds aren’t able to receive further contributions, the savings pot will grow at the same rate as the total investment. For example, if your total investment grows by four times the size, both the savings pot and vested pot will grow by four times the size.  

The savings pot allows limited access to your savings before retirement, specifically for emergencies such as medical needs or urgent repairs. You can make one withdrawal per tax year for a minimum amount of R2,000, but withdrawals are taxed at your marginal rate and subject to an administration fee.  

The bulk of your savings, as mentioned, goes into your retirement pot. This is reserved exclusively for use at retirement, where you will need to purchase a retirement product such as a living annuity or life annuity.  

The Two-Pot System encourages long-term financial planning while providing a safety net for unforeseen events. Please consult the latest FSCA guidance on the Two-Pot Retirement System. 

Common preservation fund mistakes 

Avoiding common pitfalls can make a significant difference in your long-term financial security. Even small missteps can have lasting effects on your retirement savings, reducing growth potential and impacting how much you have available to provide you with an income during retirement. Let’s take a look at some of the most frequent mistakes we see investors make.   

Cashing out too early  

It can be tempting to withdraw from your savings. You may have earmarked the money for something in particular, such as a new car, or you may even need the money for an emergency. If you have a vested pot, as mentioned above, you will be eligible for one withdrawal from this pot before retirement, but doing so can significantly impact the long-term growth potential.  

Early withdrawals interrupt the power of compounding and diminish the income your savings could generate in retirement through an annuity. You should also consider the tax consequences of withdrawing from the fund early, as you may end up giving a lot of money that could have serviced your retirement to the tax man. Finally, you won’t be able to put that money back into your preservation fund, and bigger lump sums are notoriously difficult to replace over time, even if you did, for example, open another retirement annuity.  

If possible, you should look to keep your retirement savings invested to allow it the time and opportunity to potentially grow and compound, leading to greater financial security in your retirement years.  

Ignoring fees 

We often find that investors overlook the importance of fees, but they are an incredibly important factor that can play a major part in the growth of your savings over time. High fees may mean that you have fewer returns available to be reinvested into your preservation fund, while lower fees may mean you have more returns to reinvest and potentially compound over the long term.  

As you are not able to add contributions to your preservation fund, your focus should be on minimising fees and maximising returns for best results. Let’s look at an example to show the effect of high fees. We will compare fees of 3% with fees of 1%. 

Let’s assume the following factors: 

• Investment period of 30 years 
• Investment of R500K 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is R 1.99m 

Example 2 (3% Fees): Real investment value is R 1.16m 

We can clearly see how fees impact your real investment value. Note that this example is for illustrative purposes only, and real results may vary. You can learn more about the importance of fees here.  

These are some typical fees that you can expect to see deducted: 

Advisor fees: These are the fees which you would see charged by an advisor for the advice they give and any additional work that they do for you. 

Administration fees: These are the fees charged for administration tasks. These would be tasks such as tax and compliance. 

Management fees: These are the fees deducted for the management of the fund. 

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A great way to keep up with fees is to review your Effective Annual Cost (EAC). This is a metric introduced by ASISA in 2015 that allows you, the investor, to view the total fees and costs associated with owning an investment over a one-year period of time. All factors being equal, a higher EAC may mean that there are fewer returns available to be reinvested and potentially grow over time. A lower EAC, on the other hand, may mean that there are more returns to be reinvested and allowed to potentially compound.  

Consider using our free EAC calculator, one of the many tools available as part of our online suite of resources. This can be a useful tool to compare and evaluate the EAC charged by different service providers.  

At 10X, we have a cost-effective and transparent fee structure. Fees charged on most retirement products are less than 1%, depending on the product chosen and the amount invested.   

Not paying attention to asset allocation 

Asset allocation should be carefully considered when managing your preservation fund. This is the mix of different asset classes in which your savings are invested. 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 

These asset classes include equities, bonds, real estate (property) and cash. At 10X, you have the freedom to customise your underlying portfolio by choosing from a selection of carefully curated funds, each with a different asset allocation and geared towards different investor profiles.  

As you’re deciding on the right funds to invest in, you would ideally look to include some equities in your portfolio. They are the most volatile of the asset classes, but also likely to generate the best returns over the long term. As data suggests, 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 doesn’t guarantee future results.  

Bonds will likely realise lower returns, but they are more stable than equities. Real estate, on the other hand, can also be volatile, but may generate good returns. Cash is likely to generate the lowest returns of all the asset classes but is the most stable of all.  

You generally want to avoid having too much of your preservation fund invested in cash, as the returns generated are likely to be low. You may also want to diversify your portfolio offshore, as this allows you to invest in different industries, asset classes and regions while balancing both risk and return. Diversifying offshore can also be a good hedge against any local market volatility that may occur in South Africa and subsequent depreciation of the Rand. The funds you choose to invest in should align with your financial goals, your risk tolerance levels and investment timelines.   

You’ll also need to pay careful attention to Regulation 28 of the Pension Funds Act, as all retirement products are subject to it. This act was implemented in order to help investors to avoid a poorly-diversified portfolio. Current regulations put a cap on the percentage of your retirement annuity that you may invest in both equities and offshore. This cap is currently sitting at 45% for offshore investments and a 75% allocation limit for equities.  

At 10X, we offer a range of well-diversified funds that allow investors to choose one that matches risk tolerance levels, investment timelines and financial goals. We understand the importance of asset allocation and the impact this can have on the growth of your preservation fund. Please visit our funds page for the most up-to-date fund information.   

Choosing the wrong provider 

When it comes to selecting a service provider, your choice will come down to personal preference and whether or not the service provider is in alignment with your retirement goals. Let’s look at some of the factors and questions to consider when evaluating service providers:  

• Fees: Understand the total fees charged, including management, administration and performance fees. You can then compare these across providers to determine if there are lower-cost options, as lower fees can have a major impact on long-term growth. Keep in mind that fees are just one factor to consider when comparing providers.  
• Reputation: Research the provider’s history, stability and client satisfaction levels to determine if they have a solid and respected reputation. A provider with a consistent and strong reputation is more likely to manage your savings responsibly.  
• Client service and accessibility: Does this provider offer a good level of service to clients? Consider how easy it is to get hold of a consultant when you need a query answered. In addition, review whether the digital platform is user-friendly and transparent, making it easy for you to track performance.  
• Investment approach: What investment strategy does the service provider make use of? The investment approach of the service provider should align with your risk appetite, time horizon and fee expectations.  
• Asset allocation and diversification: Is your current asset allocation meeting your financial goals and long-term plans? Consider whether the provider’s investment strategy offers a well-diversified mix of asset classes that supports your long-term financial goals.  

If you do find that your current service provider is not ticking all of the boxes, it’s a relatively straightforward process to move to a new service provider. 10X follows an index-tracking investment strategy with a more active approach to asset allocation, allowing us to keep fees low in an investment strategy geared towards long-term returns that produce the investment and retirement outcomes our clients deserve.  

Not aligning with your bigger retirement plan 

A preservation fund does not exist in isolation and plays an integral role in your broader retirement plan. To make the most of it, you must consider how it integrates with your full financial picture, including other retirement products, personal savings and long-term income goals. Viewing your preservation fund alongside other vehicles like retirement annuities, employer pension funds and other investments keeps all elements of your retirement plan working together towards the same objective.  

You should also consider liquidity and risk. Keeping an accessible emergency savings fund can prevent you from withdrawing prematurely, allowing your retirement capital to potentially continue compounding. As you approach retirement, you’ll also have to think about how you’ll convert your savings into income by choosing between a living annuity and a life annuity.  

Aligning your preservation fund with your overall retirement plan ensures that each element supports the other. A cohesive strategy makes it easier to manage risk, optimise tax efficiency and create a clear roadmap.  

Final thoughts on preservation fund mistakes 

In conclusion, there are a number of mistakes that you ought to avoid making when it comes to your preservation fund. It’s important to always try to keep your savings invested and avoid withdrawals if you can, be aware of what you are paying in fees and ensure you always keep aligned with your long-term retirement plan and goals.  

To learn more about preservation funds or to explore the retirement product options at 10X, get in touch with one of our investment consultants today!