• A preservation fund lets you preserve retirement savings from an employer pension or provident fund, but access before retirement is limited and withdrawals can affect your long-term retirement outcome.
• The Two-Pot Retirement System separates retirement savings into savings, retirement and vested components, each with different access rules, tax implications and withdrawal limits.
• Before withdrawing, investors should consider tax, lost compounding growth, fees, asset allocation and whether the remaining capital will still support their retirement income needs.

A preservation fund allows South Africans to continue preserving their savings for their retirement years if they leave an employer or change jobs. However, it is important to remember that there are rules governing access to money from your fund before retirement. You may consider these rules only when you need to withdraw capital, such as when you are financially constrained, but it’s important to be aware of the rules that apply to withdrawals and how they may ultimately affect your retirement outcomes. There may be a tax impact, as well as an impact on the money available for your retirement years. In this article, we take a more in-depth look at what a preservation fund is, the rules around withdrawing money from your fund, the Two-Pot Retirement System, fees, fund selection, and how 10X can support investors.

What is a preservation fund?

A preservation fund is a long-term retirement savings product that allows you to preserve the savings you have previously been saving in an employer-sponsored pension or provident fund when you change roles. A transfer from your provident fund to a provident preservation fund, or from a pension fund to a pension preservation fund, will usually not trigger a tax event. This type of fund does not allow any further contributions. This is important to note if you are considering withdrawing any money, as this capital cannot be added back to your fund at a later stage. At retirement, these savings will be used to purchase an annuity. This annuity will then provide you with income for your retirement years.

Switching jobs? The maths shows that preserving your pension is much smarter

Thinking about cashing out your pension when you move jobs? The maths shows that preserving your retirement savings is much smarter. Read more

Why preservation fund withdrawal rules matter

A preservation fund is used to grow your savings for retirement. If you withdraw money from your fund, this may have an impact on the money that you have available for your retirement years. You may also need to pay tax on your withdrawal, which will then reduce the amount of cash that you have in hand. It is also important to consider the potential compounding growth that you may miss out on. This may be of particular consideration if you have many years until retirement, as this could be a missed opportunity to potentially grow and compound your capital over time. Before withdrawing money, it is important to be aware of the applicable rules and regulations, as well as the potential consequences. H2: The Two-Pot Retirement System and Preservation Fund Withdrawals

The Two-Pot Retirement System was introduced on 1 September 2024 in South Africa. This new system divides retirement savings into three components with different rules regarding access applied to each component.

New contributions are generally allocated one-third to a savings pot, and two-thirds to a retirement pot. Any savings that accumulated prior to this system will remain in a vested component. This vested component will be governed by the rules that were in place before the new Two-Pot System was introduced. As a preservation fund does not allow contributions, this part will not apply.

Savings Component: The savings component is designed to allow you limited access to withdrawals before retirement. A withdrawal is generally allowed once per tax year. This is subject to a minimum amount of R2,000. You will usually be taxed at your marginal income tax rate, and an administration fee will be applied. Ideally, withdrawals should be avoided to keep your capital invested and potentially grow over the long term.

Retirement Component: The retirement component is intended to remain preserved until retirement and is usually used to provide retirement income via an annuity of your choice. The earliest retirement age in South Africa is currently 55, but many continue to work well beyond that age.

Vested Component: The vested component applies to savings prior to 1 September 2024. The previous rules 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 tax works when you withdraw before retirement

It’s important to understand how you will be taxed before you decide to go through a withdrawal. As mentioned above, if you are withdrawing from your savings pot, you will usually be taxed at your marginal tax rate. Any withdrawals you make from your vested component will be taxed according to the retirement lump-sum tax tables. The current tax rates below, as taken from the SARS website, will apply:

What happens at retirement?

From age 55 in South Africa, you will have the option to retire from your preservation fund, although many investors keep their fund invested for much longer. You can take your savings component in cash, or use these savings for a life or living annuity.

This is an important point to plan for before you reach retirement age, as your decision may affect your tax position, your available retirement income and how much flexibility you have in the years ahead. The right option will depend on your personal circumstances, the type of preservation fund you hold and the rules that apply to the different components of your fund.

100% of the “retirement pot” will be used to purchase a life or living annuity. For your “vested pot”, which is governed by the old rules, you can access one-third in cash, and two-thirds will be used for either a life or a living annuity. Your life or living annuity will then provide you with income in retirement. Before making a final decision, it can be helpful to review how much income you may need, whether you want flexibility or certainty, and how long your retirement savings may need to last.

Why withdrawing can affect your future retirement income

The visible cost of an early withdrawal is the tax that will be deducted. The less obvious cost is the lost opportunity: the withdrawn capital will no longer be able to grow and compound over time.

This is why the true cost of withdrawing may be higher than the amount that leaves your preservation fund. Once the money has been paid out, it is no longer invested in the retirement structure and no longer has the same opportunity to benefit from market growth over the years ahead.

As such, there is lost growth potential that you may now experience as an investor. This is especially true if you still have many years left until retirement, as this capital may otherwise have had many years of potential growth. The longer your time horizon, the more important this becomes. A withdrawal in your 30s or 40s may seem manageable at the time, but that capital could have remained invested for several more decades. Even a smaller withdrawal can have a larger long-term effect once future growth and compounding are taken into account.

Withdrawing early may also affect your potential available retirement income, as from the retirement age your fund may be used for an annuity. Any early withdrawals may impact your lifestyle in retirement.

This does not mean that you should never access your preservation fund if you genuinely need to. However, it does mean that any withdrawal should be carefully considered. Before making a decision, you may want to consider the tax payable, the amount that will remain invested, your years until retirement, and whether there are sources of emergency cash available to you.

Fees

Fees are an important factor in the potential growth of your preservation capital over time. As your preservation fund does not allow for any further contributions, fees are especially important. Higher fees mean less money is available for investment, which could ultimately affect your fund’s growth.

Let’s look at how fees may affect your fund when compounded over the long term. We will use the following information for our example:

• Starting capital: R2 million
• Investment period: 20 years
• Gross annual return: 10%
• Annual inflation rate: 5%
• No withdrawals

Scenario 1 - 1% fees: The preservation fund would grow to approximately R4.3 million after 20 years. (inflation-adjusted value)

Scenario 2 - 3% fees: The preservation fund would grow to approximately R2.9 million after 20 years. (inflation-adjusted value)

This example is for illustrative purposes and real values may vary. If you would like to read more on the effects of fees, take a look at this article doing the math. These are a few of the usual fees that you may see charged on your preservation fund:

• Administration fees: These are the fees related to compliance, reporting, tax and any other administration-related tasks.
• Advisor fees: If you have an advisor, they will charge for their advice and services. There may be both an initial and an ongoing fee charged.
• Management fees: These are the fees that are charged for the running of the fund.

Let’s have a look at a couple of important terms that you may see on your statement:

• Effective Annual Cost (EAC): An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges.
• Total Investment Charge (TIC): This is the total investment charge, which allows you to compare the full cost of the investment portfolio.
• Total Expense Ratio (TER): The ongoing expenses of an investment fund, allowing you to compare the operating costs of similar funds.

Your EAC is a standardised metric introduced by ASISA in 2015. It allows you to compare total costs over a one-year period more consistently across service providers. You can find the EAC percentage on your investment statement. All other factors being equal, a higher EAC may mean fewer returns available to build and grow over time. A lower EAC may result in more returns available to build and compound over the long term. The EAC should be just one factor to consider when comparing different service providers. Fees at 10X are low-cost, simple and transparent. Fees charged on retirement products, such as preservation funds, are usually 1%, depending on the amount you decide to invest. Please explore our products for more information on the fees.

The importance of asset allocation

Asset allocation may be an important factor in the growth of your fund over time. This research from Brinson, Singer and Beebower highlights the importance of asset allocation. You would look to align your asset allocation with your risk profile, investment timelines and long-term financial goals. The usual mix of asset classes is: equities, real estate, bonds, and cash.

Equities aim to provide long-term capital growth in your portfolio and potentially deliver returns above inflation. They offer exposure to companies and economic growth, but this can be accompanied by market declines. You may experience fluctuations over shorter periods. Equities may be best suited to you if you have a long investment horizon and are comfortable with some volatility in your portfolio.

Bonds can add income, diversification, and some stability to your portfolio. They are generally less volatile than equities, but they may still carry risk. Bond values can be influenced by factors such as interest rate changes, inflation expectations, and the issuer's ability to repay its debt. Bonds are more conservative, but they may still outperform expected returns.

Real estate (property) allows for exposure to real assets and economic activity, whilst also generating income. It may help to add to long-term portfolio growth. You may find that listed property can be volatile. Factors such as changes in the market, occupancy levels, economic conditions and interest rates may have an impact. Real estate may also be a good hedge against inflation.

We've built the 'happy retirement' machine

Understanding the most effective strategy for investing your retirement savings is fundamental to experiencing a happy retirement. We've built an investment machine that gives you a great chance of really golden years. Read more

Cash is less likely to experience the same levels of volatility as equities or real estate. It is usually the most stable of the asset classes. However, cash may struggle to keep pace with inflation over time, which can erode purchasing power.

Preservation Funds are subject to Regulation 28 of the Pension Funds Act, which limits the percentage you may invest both offshore and in equities. Current regulations state that you may invest up to 45% offshore and 75% in equities.

As an investor with 10X, you do not need to choose individual shares, bonds or properties. Instead, you may select from a range of diversified 10X investment funds. Each fund has a predetermined mix of asset classes and is designed for a specific type of investor, risk profile and investment horizon. You may choose the fund that most closely aligns with your financial goals, time horizon and risk tolerance. At 10X, our range of well-diversified funds offers you exposure to a variety of asset classes. Please visit our fund page to learn more about the funds available.

How 10X supports investors

10X offers a number of free, online tools available to you on our website to help you with your retirement planning.

Consider using our EAC calculator, the Preservation Fund Calculator or the Two-Pot calculator to help you compare different costs or scenarios. We use an index-based investment strategy alongside a more active approach to asset allocation. You can also expect clear, transparent and easy-to-understand fees, so there is no ambiguity about what you will be charged.

We also offer access to investment consultants who can help you with transfer and administration processes, fees, fund selection, and more details on preservation funds. Following discussions with our consultants, the ultimate decision rests with you once you've reviewed the relevant information and considered your options.

Final thoughts on preservation fund withdrawals

A preservation fund is a great way to continue saving for your retirement years while preserving your capital. However, it’s important to tread carefully when withdrawing savings from your fund. You would want to consider tax implications as well as the different rules that apply to your savings, retirement and vested components.

The 10X preservation fund is a low-cost option that offers access to a well-diversified range of funds and excellent client service. Don’t hesitate to get in touch with the experienced and helpful 10X investment consultants if you would like to find out more.