Preservation fund planning: Why low fees matter

A preservation fund is a retirement savings vehicle that allows you to preserve, and potentially grow, your hard-earned savings over time. A preservation fund allows you to transfer your savings from an employer-sponsored pension or provident fund to a preservation fund. This will usually happen when you move jobs. The idea is to allow your savings to continue to grow, instead of you withdrawing the money.

Preservation funds do not allow for any further contributions, which means you are reliant on good investment returns in order to see your capital grow. As such, you would look to minimise any fees, as this may reduce the returns that you have available to reinvest. In this article, we will take a closer look at the importance of fees. Although fees may seem small and insignificant to some, they may have a huge impact on your long-term retirement outcomes. This will be especially evident when fees are compounded over the long term.

Understanding preservation funds

A preservation fund is a long-term savings vehicle that allows you to continue to save for your retirement years. Your employer-sponsored pension or provident fund can be moved to a preservation fund without triggering a tax event. You will need to ensure that if you have a pension fund, this is transferred to a pension preservation fund, and if you have a provident fund, then this must be transferred to a provident preservation fund.

Growth within the fund is also tax-free. From the age of 55, which is the minimum access age in South Africa, your preservation fund may be moved across to an annuity (either a life annuity or a living annuity). An annuity will provide you with an income for your retirement years. As mentioned previously, a preservation fund does not allow for any further contributions, so careful consideration needs to be given to factors such as fees as well as asset allocation.

What fees do you pay in a preservation fund?

There are a few typical fees that you can expect to pay. Let’s look at these fees in a bit more detail:

• Management fees: These are the fees charged for the management and running of the fund.
• Administration fees: There will be administration fees charged for admin-related tasks. These will be tasks such as reporting, compliance and tax.
• Advisor fees: If you make use of an advisor they may charge both an initial and an ongoing fee. These fees will be for the services and advice that they give you as a client.

If the fees that you are paying are high, this may result in fewer returns available to be reinvested and compounded over the long term. Lower fees, on the other hand, may mean that there are more returns available to reinvest in order to grow and build your capital over the long term. Let’s have a look at an example which highlights the effect of fees (1% vs 3%) over the long-term.

Let’s assume the following factors for our example:

• Investment period of 30 years
• Investment of R100,000
• Return of 12% per annum
• An inflation rate of 6%

Example 1 (1% Fees): Real investment value is R398,578.

Example 2 (3% Fees): Real investment value is R231,004.

This example helps to illustrate the great effect that a small difference in fees can have on your real investment value when compounded over time. This example is for illustrative purposes, and real results may vary. You can find out more about how fees affect long-term outcomes here.

It’s important to check your Effective Annual Cost (EAC). This is a standardised metric that allows you to view the total fees and costs involved with owning an investment product over a one-year period of time. All factors being equal, a higher EAC would mean that less of your investment returns can be reinvested and potentially grow and compound over time, while a lower EAC may mean that more returns may be reinvested and allowed to potentially grow over the long term.

The EAC should be displayed on your investment statement or requested from your service provider. It will be shown as a percentage. It’s important to remember that the EAC of an investment is just one factor to consider when comparing different service providers.

Preservation funds and the Two-Pot Retirement System

There are some new rules in place regarding retirement products, including preservation funds. The Two Pot Retirement System was implemented in September 2024 in South Africa, and this has meant some changes regarding how contributions and withdrawals are now treated. All contributions to retirement products will now be split between two ‘pots’. These pots are referred to as the ‘retirement pot’ and the ‘savings pot’. There is also a third portion. This is called the ‘vested pot’. The vested pot applies to all contributions that were made prior to the implementation of the Two Pot Retirement System.

Two-thirds of contributions will be allocated to the retirement portion, and one-third of contributions will be allocated to the savings portion. It’s important to note that preservation funds do not allow for any further contributions, so any rules regarding contributions will not be applicable to this kind of vehicle. However, the savings component of the preservation fund will grow at the same rate as the total fund. If the total fund grows by double the size, both the savings pot and the vested pot will also grow by double the size. Please consult the latest FSCA guidance on the Two-Pot Retirement System.

Asset allocation and your preservation fund

Since no new contributions can be made to your preservation fund, it’s even more important to get your asset allocation right. Asset allocation is an important consideration when it comes to managing your preservation fund. 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.

Your asset allocation mix may consist of equities, real estate (property), bonds, and cash. When you are structuring your asset allocation, you would want to consider your investment timelines and your risk tolerance levels, as well as your long-term financial plan and goals. Your asset allocation should be well-aligned with these three factors. At 10X, you have the freedom to adjust your underlying portfolio by choosing from a range of carefully curated funds, each with a different mix of assets and aimed at different investor profiles.

Equities will most likely provide you with the best returns in the long term, although they will also be the most volatile of the asset classes. 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 does not guarantee future results. Real estate may also provide some good returns, while being a good hedge against inflation.

Bonds will add stability to your portfolio, but they may produce some lower returns (despite being seen as a more conservative option, bonds may still outperform expectations). Cash is likely to produce the lowest returns of all the asset classes, while also being the most stable and liquid.

Regulation 28 of the Pension Funds Act will need to be adhered to when it comes to your fund’s asset allocation. This Regulation puts a cap on the percentage of equities and offshore exposure that you may have in your portfolio. Current regulations state that you may have a maximum of 75% invested in equities and 45% offshore. 10X offers investors a wide range of funds that are well-diversified across the different asset classes and are also Regulation 28 compliant. Please visit our funds page for the most up-to-date fund information.

How to evaluate fees in your preservation fund

You want to ensure that you are clear on the fees that your service provider is charging you. Fees should be transparent, and there should be no ambiguity as to the fees that you are being charged. You should review your fees annually. Always check your EAC on your statement. It’s also important to consider the value that you are receiving in return for the fees that you are paying. If you are making use of an advisor, are you getting value back in return, or should you be making more use of your advisor and the services that they offer? Consider asking yourself the following questions when evaluating the fees:

• Am I aware of all the fees I’m being charged, including any indirect costs?
• Are my fees competitive when compared to other providers?
• Is there a clear breakdown of costs available to me from my service provider?
• Have my fees changed over time, and do I understand why?
• Am I paying for services that I am not actively using?

Just by asking these questions, you can make more informed decisions and ensure that you are not paying more than necessary, which allows more of your returns to be preserved and potentially grow and compound over time.

Index-tracking: A low fee investment strategy

An index-tracking investment strategy is designed to mirror the performance of a benchmark index fund, such as the S&P 500, aiming to match the performance of that index. This kind of strategy is quite different from an active management strategy. An active management strategy is when a fund manager actively looks to find the stocks that they believe are likely to produce the best returns. This kind of approach involves a fair number of activities. These would be activities such as research, analysis, and buying and selling costs. The higher number of activities may result in higher management fees for you, as an investor.

The S&P Indices Versus Active (SPIVA) Scorecards track the performance of actively managed funds against their benchmarks globally. According to the latest SPIVA South Africa Scorecard (as of June 2025), 67.61% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending June 30, 2025. An index-tracking investment strategy looks to focus on consistency and long-term returns and growth for investors. Costs may also be lower, due to the fewer number of activities that are associated with this kind of investment strategy. 10X makes use of an index-tracking investment strategy alongside a more active approach to asset allocation. This allows us to keep our fees lower, while aiming for superior returns for our clients over the long term.

How 10X approaches fees

In many cases, investors may not be fully aware of the total costs they’re paying across products, which is why transparency is a key part of our approach. Our fees at 10X are kept simple, transparent, and low-cost. We understand the importance of minimising fees so that more of your returns can be reinvested to potentially grow and compound over the long term.

There are no hidden costs or surprises when it comes to the fees that we charge. Over the long term, even small differences in fees can have a major impact on your retirement outcomes, which is why keeping costs low is a key focus for us. The fees charged on retirement products are usually less than 1%. Please explore our products for the most up-to-date fee information.

At 10X, we offer a useful EAC calculator which can help you to analyse and compare the fees that you are paying with the fees charged by other service providers. This calculator is a free online tool, which is a part of the free online resources available to investors on our website. Our 10X preservation fund is a low-cost, transparent option that focuses on generating excellent returns for our clients in the long term.

Final thoughts on preservation fund fees: Small fees, big impact

Even though fees charged may seem small, and even trivial, these fees, when compounded over the long term, can have a significant impact on the potential growth of your preservation fund and, ultimately, your retirement outcomes.

There are many areas as an investor that you are unable to control, but fees are an exception - so you would want to ensure that where possible, you’re able to keep fees as low as possible. Thus, allowing for potentially more growth of your savings over time.

If you have any questions surrounding any aspect of your preservation fund, don’t hesitate to reach out to the skilled and experienced investment consultants at 10X! Get in touch today and secure your future!