Preservation fund: What to do with your pension or provident fund when leaving your employer

• A preservation fund allows you to keep your pension or provident fund savings invested when leaving your employer, helping you preserve capital for retirement.  

• Withdrawing your retirement savings can result in tax liabilities and the loss of potential compound growth, while the Two-Pot Retirement System lays out which portions you can access.  

• When choosing a fund, consider investment fees, asset allocation, fund options and long-term growth potential. 10X offers low, transparent fees and diversified investment options.  

Leaving your employer can be a major life event with financial implications, prompting you to consider a preservation fund. There are many reasons you might leave an employer or take a break from employment, including changing jobs, returning to study, being retrenched, starting your own business, or taking a career break.   

Whatever the reason, if you belong to an employer-sponsored provident or pension fund, you’ll need to decide what to do with the retirement savings you’ve accumulated over the years. A preservation fund can keep your savings invested so they can grow and compound over the long term.   

When deciding whether to withdraw your company pension or provident fund savings or transfer them to a preservation fund, consider key factors such as fees, potential withdrawal tax, compound growth, asset allocation, and your long-term financial plans and goals. In this article, we’ll take a closer look at what to do with your pension or provident fund when leaving your employer. 

What is a preservation fund? 

A preservation fund is a long-term retirement investment that allows you to continue saving money transferred from an employer-sponsored pension or provident fund without triggering a tax event. A provident fund should be transferred to a provident preservation fund, and a pension fund to a pension preservation fund.   

Within the fund, you can choose the underlying funds in which your capital is invested. Preservation funds do not allow further contributions, so careful management is important. From age 55, South Africa’s earliest retirement age, you can transfer your savings to an annuity, which will provide income during your retirement years. 

What are your options when leaving your employer? 

Option 1: Transfer your savings to a preservation fund 

You may consider transferring your capital across to a preservation fund. This will allow you to preserve your savings and potentially grow them over time so that they can provide for your retirement years.   

One of the main advantages of this option is that you can transfer your retirement savings without triggering an immediate tax liability, provided the transfer meets the relevant requirements. You can also choose a service provider and investment options that suit your financial goals, risk tolerance and investment timeline. It’s worth comparing fees and available funds before deciding where to transfer your money.  

Option 2: Leave your retirement savings in your previous employer's fund

Some employer funds will allow you to remain in the fund as a paid-up member. However, this will depend on the rules of your specific fund. It’s important that you are aware of fees that you will be paying as well as the asset allocation and fund options available to you.  

This option may be convenient if you’re satisfied with your existing investment arrangements and don’t want to transfer your savings immediately. You should, however, check whether your fund’s fees, investment options or other conditions will change once you are no longer employed by the company. It’s also important to continue reviewing your savings regularly, even though you are no longer making contributions through your employer.  

Option 3: Withdraw the money you're permitted to accessH3: Option 3: Withdraw the money you're permitted to access 

If you are considering withdrawing from your provident or pension fund, you will need to consider the tax implications of withdrawing. You would also want to consider the potential loss of compounding growth that you may now miss out on. It’s important to also be aware of the different rules that apply to withdrawals so you are clear what is and isn’t allowed. 

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The Two-Pot Retirement System has changed the rules around accessing retirement savings, meaning you may only be able to withdraw certain portions of your capital when leaving your employer. While accessing this money can help cover immediate expenses, such as living costs between jobs, it could significantly reduce the amount available for retirement. Before withdrawing, consider whether you have other savings or income sources that could help you meet your short-term financial needs.  

Option 4: Transfer your savings to your new employer’s retirement fund  

This may be an option if you’re moving to another employer that offers a pension or provident fund. Transferring your existing retirement savings to your new employer’s fund can help you consolidate your retirement investments and simplify management. However, it’s important to compare fees, investment options and other fund conditions before deciding to transfer. 

Cashing out vs preserving: Why your decision matters  

When leaving an employer, it can be tempting to withdraw your funds. However, it’s important to consider the long-term effects. First, there may be tax implications, as you could owe tax on the withdrawal. You should also consider the potential loss of compounding growth.  

Keeping your money invested gives it the opportunity to grow over time. Withdrawing funds reduces the capital available to grow and means losing not only that portion of your capital, but also any future returns it might have earned. 

For example, if you withdraw R100,000 from your retirement savings when changing jobs, you’re not simply reducing your retirement capital by R100,000. You’re also giving up the potential investment returns that the money could have generated over the next 10, 20, or 30 years. Even if you plan to replace the withdrawn amount later, rebuilding those savings could require considerably higher contributions.  

What are the tax implications of withdrawing your pension or provident fund? 

When it comes to tax, the table below illustrates the tax that will be applied to withdrawals. The table below has been taken from the SARS website: 

It’s important to consider the tax implications when withdrawing cash. It’s important to note this table applies to retirement lump-sum withdrawal benefits. Withdrawals from the Two-Pot component are taxed differently, at your marginal income tax rate. Previous retirement fund withdrawals and certain other lump-sum benefits may also affect the amount of tax you owe.  

How does the Two-Pot Retirement System affect your options when leaving employment?  

The Two-Pot Retirement System was introduced in South Africa on 1 September 2024. This system divides retirement savings into three components: a savings component, a retirement component and a vested component. Each has different rules regarding withdrawals and access to retirement capital.   

Under the system, new contributions to qualifying retirement funds are generally divided between the savings component (one-third) and retirement component (two-thirds). However, preservation funds do not allow additional contributions, so this allocation does not apply to new contributions within this type of fund.   

Most retirement savings accumulated before 1 September 2024 were allocated to the vested component, apart from an initial amount transferred to the savings component when the system was introduced. The vested component generally remains subject to the retirement and withdrawal rules that applied before the Two-Pot Retirement System came into effect.    

Savings Component: The savings component is designed to allow you limited access to withdrawals before retirement. A withdrawal is allowed once per tax year. This is subject to a minimum amount of R2,000. You will be charged tax at your marginal income tax rate, and there will be an administration fee deducted. If possible, withdrawals should be avoided to allow your capital to remain invested, potentially grow over the long term, and provide for your retirement years.    

Retirement Component: This component is intended to remain preserved until retirement and will then be used to provide retirement income via an annuity of your choice. The retirement age in South Africa is currently 55.  

Vested Component: The vested component is for those savings prior to 1 September 2024. The previous rules prior to the Two-Pot System will apply to this component. This may allow for one withdrawal prior to retirement.  Please consult the latest FSCA guidance for the most up-to-date information on the Two-Pot System. 

How to transfer your pension or provident fund to a preservation fund 

Let’s have a look at the various steps that are involved when it comes to transferring your pension or provident fund:  

1. You would need to notify your employer of your wish to transfer to a preservation fund and request the relevant withdrawal/transfer form from the current service provider. 
2. Compare the various preservation fund service provider options available, looking at fees, fund options, investment approach, customer service and more. 
3. Once you have decided on your preferred service provider, you will need to complete the relevant application form, which requires selecting your preferred fund(s) and nominating a beneficiary.  
4. You will then need to submit your completed forms along with the relevant supporting documents to both parties. 
5. Follow the progress of the transfer and ensure that the transfer is completed accurately and timeously.  
6. Make sure to do an annual review of your preservation fund, checking your fees, funds and beneficiary nominations.   

If you would like to find out more about the process, you can read further here. 

The importance of asset allocation 

Asset allocation plays an important role in the potential growth of your fund’s capital over time. The research from Brinson, Singer and Beebower highlights the importance of asset allocation when it comes to investment growth. Your asset allocation is the set of assets included in the fund you are invested in. This will include equities, real estate, bonds and cash.  

Equities are earmarked to potentially provide long-term capital growth and returns above inflation. They will also add exposure to companies and economic growth, but this may come with some significant market declines. These may be most noticeable over shorter time periods, suggesting that equities may be most appropriate for investors with longer time horizons and those comfortable with some volatility in their portfolios.  

Real estate provides exposure to real assets and economic activity, as well as income through rentals and distributions. It may also add long-term growth in your portfolio. However, listed property can be volatile and may be affected by interest rates, economic conditions, occupancy levels, and changes in the property market. Real estate may also serve as a good hedge against inflation.  

Bonds can add diversification, income and a degree of stability within a portfolio. They are considered less volatile than equities, but they are not completely risk-free. Bond values can be affected by changes in interest rates, inflation expectations, and the issuer's ability to repay its debt. They may outperform expectations, despite being more conservative.  

Cash is generally the most liquid and stable of the asset classes. It is less likely to experience the same levels of volatility as those seen in equities or real estate. However, you may see cash returns struggle to keep pace with inflation over the long term, reducing purchasing power.  Our funds at 10X are well-diversified across asset classes and Regulation 28 compliant. You are able to find out more about our available funds on our funds page. 

Preservation fund and the importance of fees 

When comparing providers, look for one with low, transparent fees. Lower fees leave more of your returns available to reinvest, helping your investment grow and compound over time. This is especially important with preservation funds, since you can’t make additional contributions. When reviewing fees, you may come across the following:  

• Administration fees: There will be fees charged for the administration tasks linked to the fund. 
• Advice fees: If you are using an advisor, they may charge an initial and an ongoing fee for their advice. 
• Management fees: These are the fees charged for the running of the fund. 

 As an investor, it’s important to understand the following terms when reviewing fees:  

• TER (Total Expense Ratio): These are the ongoing expenses within an investment fund, calculated according to the applicable standard. 
• TIC (Total Investment Charge): This is 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 EAC is a standardised metric introduced by ASISA. It estimates the annual impact of all applicable charges by combining the various costs associated with an investment into a single annual percentage. These may include investment management fees, administration costs, advice fees, penalties, guarantees and more, depending on the selected product. The EAC helps investors compare the cost structures of different products and providers more easily and consistently.  

Assuming all other factors are equal, a lower EAC may leave more of your money invested, where it could earn returns. A higher EAC may put greater pressure on net returns as fees compound over time. However, costs shouldn’t be considered in isolation: investment strategy, risk, service, product features, and other factors also play an important role.  Let’s look at an example which shows the impact that fees can have on your preservation fund when invested for 20 years. We will assume the following information here:  

• Starting capital: R1,000,000 
• Investment period: 20 years 
• Inflation: 5% 
• Gross annual return: 10% 
• No withdrawals 

Scenario 1 - 1% fees: The preservation fund would grow to an inflation-adjusted value of approximately R2.1 million after 20 years.  

Scenario 2 - 3% fees: The preservation fund would grow to an inflation-adjusted value of approximately R1.5 million after 20 years.  

This example is for illustrative purposes, and actual results may vary. As no further contributions can be made to the preservation fund, the effect of fees is particularly important. If you would like to read up more on fees, please have a look at this helpful math article.  

At 10X, our focus is on clear, simple and transparent fees. If you would like to find out more about our preservation fund fees, please visit our preservation fund page. 

How 10X can help you preserve your retirement savings  

10X offers a preservation fund with low, simple, transparent fees. You can choose from a range of funds that combine different asset classes, helping you select one that suits your investor profile and long-term financial goals. We follow an index-tracking investment strategy, while taking a more active approach to asset allocation.  

You’ll also find support through our free online tools and accessible information to help you make decisions. Try our EAC calculator to compare costs across service providers, or use our preservation fund calculator for scenario planning.  

Our experienced investment consultants are available to discuss your options at no extra cost and help you transfer to a preservation fund. Using a preservation fund can help keep your retirement plans on track when you change jobs or leave an employer. 

Final thoughts on preserving your pension or provident fund when leaving your employer  

Leaving your employer can be a pivotal moment in your retirement savings journey, bringing several decisions to consider. Before withdrawing, think about the tax you may owe and the potential loss of future compounding. Make sure you understand the rules of the Two-Pot Retirement system, along with fees and fund selection.  

Always remember to review your pension or provident fund before making any decisions. If you’re at a crossroads as you move to a new employer, now is a good time to explore the 10X preservation fund and discuss your options with 10X investment consultants. Get in touch to learn more.