Preservation fund red flags: Signs your retirement savings need attention

• Preservation fund red flags include high fees, unsuitable investments, outdated beneficiaries and a lack of regular reviews.  

• Unplanned withdrawals can reduce retirement savings and limit potential compound growth.  

• Reviewing your preservation fund annually can help keep your investments aligned with your broader retirement goals.  

A preservation fund is a long-term retirement savings vehicle that allows you to preserve and potentially grow retirement savings previously accumulated in an employer-sponsored pension or provident fund. Transferring your savings to your preservation fund is the first step, but it’s vitally important that you review it regularly to ensure it remains on track and meets your requirements and goals.  There are a few key factors to focus on for your preservation fund: withdrawals, asset allocation, fund selection, fees, beneficiary nominations, retirement planning, and goals. In this article, we will help you identify potential red flags so you can plan accordingly and ensure they don’t negatively affect your retirement outcomes. 

Understanding a preservation fund 

Once your retirement savings have been transferred into a preservation fund, they remain invested with the aim of growing over the long term. However, unlike some other retirement savings products, you can’t make additional contributions to a preservation fund. This makes it particularly important to manage your existing capital carefully, as your retirement outcomes will depend on factors like investment performance, fees and any withdrawals you make.  For this reason, you should regularly review your fund rather than just leaving it unattended until retirement. There are several potential red flags to look out for, including unnecessarily high fees, unsuitable fund selection and investment strategies that no longer align with your retirement goals. We’ll take a closer look at these below. 

Red flag 1: You have not reviewed your preservation fund in years 

You should review your preservation fund regularly, ideally at least once per year. This should not be neglected, as it needs to be reviewed in order to ensure that it still aligns with changing needs and goals over time. It’s expected that your risk profile, investment timelines, needs and financial goals will change over the long term, so you need to ensure that your fund is still aligned.  For example, in terms of fund selection, it is unlikely that a fund choice when you are 30 years old would be the same as your fund choice in your mid-50s when you are approaching retirement age. When you are doing your annual review, there are a few factors that you may like to focus on. Let’s have a look at some of these factors:  

1. Fees 
2. Asset allocation 
3. Fund selection 
4. Investment returns 
5. Beneficiary nomination 
6. Investment timelines 
7. Financial goals and long-term plans 

When reviewing these factors, it’s important to consider your preservation fund as part of your broader retirement plan. For example, a fund that performed well several years ago may no longer be suitable for your current risk profile or investment timeline. You may also find that your fees are higher than they need to be, reducing the returns available to invest and potentially grow over time. Since you cannot make further contributions, it’s especially important to ensure that your existing capital is managed carefully. 

Red flag 2: You are considering withdrawing cash without understanding the long-term impact 

You may be in a situation where you’re considering withdrawing the cash from your preservation fund. This is fairly common in times of financial pressure. If you are considering withdrawals, it’s important that you consider the potential impact of this.  Firstly, you should factor in the cash that you may need to pay as tax on your withdrawal. Secondly, you should also consider the loss of future compound growth that would otherwise occur, as you are now missing out on the potential compound growth that could occur while the savings are invested in the market.  

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As mentioned above, you are also unable to make any further contributions to support growth. This may then reduce the overall savings you have available for your retirement years and your potential retirement outcomes.  The tax table below from the SARS website details the tax that will need to be paid on early withdrawals. This table for the 2026/27 tax year has been taken from the SARS website.  

With the changes introduced by the Two-Pot Retirement System in September 2024, you may now be able to access some of the money from your savings pot. Of course, this needs to be carefully considered, as keeping your savings invested can lead to stronger retirement outcomes over time. 

Red flag 3: Your fees are higher than they need to be 

Fees should always be carefully monitored, as they may have the effect of reducing the returns that you have available to reinvest in your preservation fund, which may then impact the potential growth of your fund over time. This is especially relevant to preservation funds, where you won’t have the opportunity to make any further contributions.   

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

• Starting capital: R500,000  
• Investment period: 20 years   
• Gross annual return: 10%  
• No withdrawals    
• Scenario 1 - 1% fees: The fund would grow to approximately R2.80 million after 20 years.   
• Scenario 2 - 3% fees: The fund would grow to approximately R1.93 million after 20 years.     

We can clearly see how small differences in fees can lead to major differences at retirement. As no further contributions can be made, the effect of fees on the existing capital and its potential compound growth is particularly important. If you are interested in reading more about fees, have a look at this article covering the math.  These are a few of the common fees that you may wish to review on your statement:  

• Advisor fees: If you are using an advisor, you may be charged both an initial and an ongoing fee for the services and advice that you receive. 
• Administration fees: There will also be administration fees charged for tasks like reporting, compliance and tax. 
• Management fees: These are the fees charged for the running and management of the fund. 

Here are some key terms related to costs that you may come across when reviewing costs and fees:  

• TER (Total Expense Ratio): Ongoing expenses within an investment fund, calculated according to the applicable standard. 

• TIC (Total Investment Charge): The total investment charge, which combines the TER with transaction costs within the fund. 

• EAC (Effective Annual Cost): An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges. 

The Effective Annual Cost (EAC) gives investors a standardised way to understand the full cost of holding an investment over one year. It was introduced by ASISA in 2015. The EAC is shown as a percentage figure. Depending on the product, it may include admin costs, management fees, advisory fees, penalties, guarantees, and loyalty bonuses. 

Assuming all other factors are equal, a lower EAC generally means that more of your funds remain invested and available to potentially grow. A higher EAC may place greater pressure on net returns as fees may compound over time. Costs should be one factor to consider, along with factors like investment strategy, risk and client service.  Our fees at 10X are low-cost, transparent and clear, making them easier for all investors to understand. If you would like to find out more about fees, you can visit our preservation fund page. 

Red flag 4: Your asset allocation is not properly diversified 

Your preservation fund’s performance may heavily depend on your selected asset allocation, as research from Brinson, Singer and Beebower indicates. This refers to the mix of different asset classes, such as equities, real estate, bonds and cash that your savings are invested in.  

Equities may be in your portfolio to provide long-term capital growth and the potential to earn returns that beat inflation. Equities may experience substantial market declines, while also providing exposure to economic growth. You may see considerable fluctuations in value over shorter periods. This may mean that they are more appropriate for investors with longer time horizons and who are comfortable with some volatility in their portfolio. 

Real estate gives exposure to real assets and economic activity, along with providing income through rentals and distributions. It may help provide long-term growth in your portfolio. You may find that listed property is volatile and that it may be affected by factors such as interest rates, economic conditions, occupancy levels, as well as changes in the property market. Real estate may also serve as a good hedge against inflation. 

Bonds can provide your portfolio with income, stability and diversification. Bonds are generally less volatile than equities, but this does not mean that they are entirely risk-free. Bond values can be affected by factors like changes in interest rates, inflation expectations and the ability of the issuer to repay its debt. While they’re seen as more conservative, they may still deliver good returns that exceed expectations. 

Cash is usually the most liquid and stable of the asset classes. It is unlikely to be as volatile as equities or real estate. You may find that cash returns cannot keep pace with inflation over long periods, which may then erode purchasing power. 

Preservation funds are governed by Regulation 28 of the Pension Funds Act. This limits the percentage of both equities and offshore investments you may hold. Current regulations allow for a maximum of 45% offshore and 75% in equities. This is to help investors avoid poorly diversified portfolios. 

When it comes to asset allocation, you would usually look to align with your risk profile, investment timelines and long-term financial plans and goals. At 10X, our funds are predetermined and span a range of asset classes, so you don’t need to choose individual asset classes; instead, choose a fund that best aligns with your requirements and long-term goals. 

10X offers a range of funds that are both Regulation 28 and well-diversified across the asset classes. Please visit our funds page to find out more.  

Red flag 5: You do not understand your Two-Pot components 

It’s important to understand the Two-Pot Retirement System and how this will now affect your preservation fund withdrawals. This system was introduced in September 2024 in South Africa. It also affects contributions to retirement saving products, but this allocation process will not impact preservation funds in the same way, as new contributions are not permitted.  

The new system splits retirement savings into three different components that each have different access rules. New contributions will be split with one-third going to a savings pot, and two-thirds being allocated to a retirement pot. Any savings made prior to Two-Pot will be in a vested component. This component will be subject to the rules that were in place before the Two-Pot system was introduced.  

Savings Component: The savings component allows for some withdrawals before retirement, according to the rules in place. A withdrawal is permitted once per tax year, subject to a minimum amount of R2,000. Tax will be applied at your marginal income tax, and there will be an administration charge. Capital that is not withdrawn will remain invested.   

Retirement Component: This component should remain preserved until retirement and should be used to provide retirement income, subject to the retirement rules in place.   

Vested Component: The vested component is for your savings prior to September 2024, with the same rules prior to September 2024 being applied to this component.  

It’s important that you understand how the different components work and the rules regarding each. This is also important when it comes to withdrawals or planning for retirement. 

Red flag 6: Your beneficiary nominations are outdated 

Another important checklist item in your preservation fund journey is to select beneficiaries and to review these nominations annually to ensure that they are correctly stated. You would also want to review your beneficiaries and update these after any major life event or change in circumstances. This would be after a marriage, death in the family, divorce or birth of a child, to name just a few. 

It’s important to ensure that you do have a nominated beneficiary. This can help to avoid any delays. Outdated beneficiary nominations may no longer reflect your wishes or current family circumstances. During your annual preservation fund review, you should make sure that your nominated beneficiaries and their personal details are still correct.  

While beneficiary nominations help guide the distribution of retirement fund death benefits, the fund’s trustees must also consider any legal dependents and the applicable rules. Keeping your nominations updated can help make the process easier for your loved ones when you pass away. 

Red flag 7: Your preservation fund is not part of a broader retirement plan 

A preservation fund can play an important role in your retirement planning, but it is unlikely to be the only product you rely on for your retirement years. You may also have retirement savings in other products, such as a retirement annuity, employer pension or provident fund, tax-free savings account or discretionary investments. It’s important to consider how all of these products can work together to support your long-term retirement goals.  

As you can’t make further contributions, you may need to rely on other retirement savings products to continue building your retirement capital. You generally want to consider your overall asset allocation, fees, investment timelines, risk tolerance and the effects of inflation when reviewing your broader retirement plan.  

As you approach retirement, you should also consider how your preservation fund may eventually provide you with retirement income, potentially through a living annuity or life annuity. Looking at your retirement savings as a whole can help you identify any potential shortfalls and make more informed decisions before you reach retirement.  

Final thoughts on preservation fund red flags 

A preservation fund can play an important role in your financial plan, but it’s important that it is carefully managed and reviewed annually. You should always keep watch for the main red flags: high fees, no nominated beneficiaries, inappropriate asset allocation or fund selection, unclear understanding of the Two-Pot system, and unplanned or hasty withdrawals. 

If you would like to speak to our investment consultants, don’t hesitate to get in touch to chat through your various options.