Preservation funds and retirement lifestyle planning

The uncomfortable truth about retirement in South Africa - Rands and Sense by 10X [video]

We sit down with 10X Investment Consultant lead Andre Tuck and discuss the retirement savings crisis in South Africa. We also delve into living annuities, retirement annuities, TFSAs and everything in between. Read more

A preservation fund can play a huge role in your retirement planning and the sustainability of your savings. Ideally, you want your retirement savings to last throughout retirement, which means planning for your specific lifestyle and taking into account all of the potential expenses you may have during your retirement years.  

A preservation fund is a retirement savings vehicle used to preserve and grow your retirement savings that were previously in a provident or pension fund. When managing your preservation fund, you need to consider all of the contributing factors discussed below. In this article, we take a closer look at preservation funds and retirement lifestyle planning so that you can get the most out of retirement. 

Understanding preservation funds  

A preservation fund allows you to invest your savings, which have previously been in an employer-sponsored pension or provident fund. These savings are transferred when you change employers, without the need to pay any tax. The fund serves as a means for you to potentially continue growing your savings as time passes, with the end goal of it providing for your retirement.  

Avoiding any withdrawals allows you to take advantage of compound growth. Growth within the preservation fund is also tax-free, allowing more of the returns to be reinvested. Ideally, these returns will grow and compound over the long term. Keep in mind that a preservation fund does not allow for further contributions, so your investment returns and the fees you pay are important for the potential growth of your capital. 

Regulation 28 of the Pensions Fund Act puts a limit on the percentage of your retirement products that you can invest in equities, as well as the percentage that you can invest offshore. This applies to your preservation fund and must be kept in mind. Regulation 28 was put in place to help you avoid a poorly diversified portfolio. As per current regulations, you can invest 45% of your retirement savings offshore and 75% of your retirement savings in equities.  

There have also been changes in the rules regarding retirement product withdrawals. The Two-Pot Retirement System was implemented in September 2024, and splits contributions between the ‘savings’ and ‘retirement’ pots. As mentioned, this will not apply to preservation funds, as further contributions are not allowed.   

There is also a third pot called the ‘vested’ pot for all contributions made prior to the implementation of the Two-Pot Retirement System. The old rules apply to this pot, meaning you would be allowed one withdrawal before retirement from your vested pot.  

You aren’t allowed to access your retirement pot until retirement. Upon retirement (from age 55 in South Africa), this pot will be used to purchase a life or living annuity. The savings pot allows for one withdrawal per year for a minimum amount of R2,000. Remember, withdrawals are taxed at your marginal tax rate, and there will be an administration fee applied.  

Please consult the FSCA guidance document for the most up-to-date information on the Two-Pot Retirement System. 

Estimating your retirement needs  

One of the first steps to take when planning for retirement is to determine how much income you will need to maintain the day-to-day lifestyle that you desire. This is measured as a retirement income replacement value, which looks at the percentage of your pre-retirement income that you will need during retirement.  

Experts generally suggest a replacement value of around 70% to 80% of your pre-retirement annual income. This, of course, does depend on your personal circumstances. The common costs that you would need to anticipate during your retirement years would be the following:  

• Essential expenses: Costs for basics like groceries, transportation, day-to-day needs, and housing or rental costs.  
• Lifestyle choices: Of course, you should be able to enjoy life during retirement. Include costs for dining out, travel, entertainment and other personal hobbies that add value to your life.  
• Healthcare: Any costs related to your health, such as medication, doctor’s visits and similar. Often, as we age, our healthcare costs increase. This must be accounted for.  

Another consideration is the effects of inflation on your savings. Inflation has the effect of hurting the purchasing power of our money. In other words, the goods and services that you can purchase with a specific amount of money will be reduced over time due to the effects of inflation.   

10X offers a handy preservation calculator, which allows you to model a variety of different situations. This calculator is a part of 10X’s suite of free online tools available for investors to use. 

From preservation fund to living annuity or life annuity 

Upon retirement, you can take one-third of your preservation fund balance as a lump sum (subject to tax), while the remaining two-thirds must be transferred to either a living or life annuity. This annuity will then provide you with an income for your retirement years. Deciding between a life and a living annuity depends on your personal circumstances and retirement goals, as each has its own advantages. 

Building blocks to a lasting Living Annuity

Our panel of experts discusses living annuities, sustainable drawdown rates, offshore investing, and everything else one might need to consider to ensure a comfortable retirement. Read more

 A living annuity offers flexibility in terms of income options, and investors can adjust income drawdown rates to cater for changing income needs or changes in inflation rates. This, however, comes with longevity risk. In other words, there is a risk that your savings may not last for your retirement years. Living annuities demand careful planning.   

The life annuity is less flexible, but it will provide you with a fixed monthly income for the duration of your life, so there is no longevity risk or the risk of your capital running out. While this option offers peace of mind and security, it is much less flexible. Once purchased, your income is largely set, and you have a limited ability to adjust in response to inflation or changing income needs. Some life annuities offer inflation-linked increases, which can help protect against rising costs.  

The implementation of the Two-Pot Retirement System has affected some of the rules regarding your options at retirement. According to the new rules, you can withdraw your savings pot in cash, or you may transfer it to your annuity. You will need to use 100% of your retirement pot to purchase an annuity. If you also have a vested pot, you may then access up to one-third of this pot in cash, and the remaining two-thirds will need to be used to purchase either a life or living annuity. You will select either a life or a living annuity, or a combination of the two, depending on your requirements and preferences for your retirement years. 

Asset allocation and retirement lifestyle planning  

As an investor, the goal is to structure your asset allocation according to your investor profile and long-term financial plan. Your asset allocation is the mix of equities, bonds, real estate and property in which your savings are invested. As an investor with 10X, you have the option to adjust your underlying portfolio by choosing from a range of carefully curated funds, each with a different asset allocation, geared towards different investor profiles.  

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

Equities are the most volatile of the asset classes, but they may also generate the best returns. 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). Of course, past performance does not guarantee future results. Bonds are more stable but may produce lower returns. Cash is the most stable of the asset classes, but it is also most likely to generate the lowest returns.  

If you are a younger investor with a longer investment horizon, you may wish to invest a higher percentage of your preservation fund in equities. If you are an older investor with a more imminent retirement, you may wish to invest a higher percentage of your savings in bonds or cash. 

As you are not able to add any further contributions to your preservation funds, you are reliant on the market returns to potentially grow your fund. Bearing this in mind, it makes sense to include a percentage of equities in your portfolio. As mentioned above, equities have the potential to produce the best returns over the long term, hopefully outpacing inflation.  

You would also look to diversify your portfolio across the various asset classes. Thus, allowing you to take advantage of any market gains in certain asset classes while also adding in some protection against any losses that may occur in other asset classes. Diversifying your portfolio offshore may allow you to take advantage of opportunities available in the international market. The international market is a lot bigger than the local South African market, so this may present access to a wider range of companies and industries. Of course, you will need to ensure that you adhere to the Regulation 28 limits. 

10X offers many carefully curated funds, which allow you, as the investor, to find one suited to your profile and long-term plan. Our funds are geared towards producing excellent long-term results for our clients.  

One of our flagship funds is the Your Future Fund. This is a cost-effective fund providing access to both local and international assets, focusing on a higher percentage of growth assets like equities and property. This fund is best suited to an investor looking to grow their savings over the long term, with a time horizon of 5 years or more. Annualised returns are currently 11.4%. View more of our funds here. Fund information is up-to-date as of 8th September 2025. 

The role of fees in sustaining your lifestyle  

Fees should always be an important consideration when managing your preservation fund. Often, retirees fail to grasp just how much fees can impact retirement outcomes.  

The 4% retirement rule isn't dead (but your investment fees might kill it)

4% has historically been a good rule of thumb when it comes to income drawn down from retirement investments such as a living annuity. But is it still relevant, and when might it be too much? Read more

High fees may have the potential to reduce the returns that you have available to compound and grow over the long term. Lower fees, on the other hand, may allow for more returns to be reinvested and potentially grow and compound over time. Even a small difference in fees can have a major impact on how much of your savings you have available for retirement.   

Let’s look at an example to illustrate the impact of fees and assume the following information for our example: 

• Investment period of 30 years 
• Investment of R150,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is approximately R598,000. 

Example 2 (3% Fees): Real investment value is approximately R347,000. 

As this example highlights, a difference in fees of just 2% can have a major impact on the real investment value of your preservation fund. This example is for illustrative purposes only, and actual results may vary. You can learn more about the impact of fees here.  

The typical fees that you can expect to see charged are the following: 

Administration fees: These are the fees charged for the administration tasks, such as compliance, reporting and tax activities. 

Advisor fees: Your advisor will charge fees for the financial guidance offered alongside other services. There is usually both an initial and an ongoing fee charged. 

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

As an investor, you need to be aware of the Effective Annual Cost (EAC) of your preservation fund. This is a way for you to view all of the costs associated with owning an investment over one year. It is a metric that was implemented by ASISA in 2015. You should generally be able to view your EAC on your investment statement.  

All factors being equal, a higher EAC may mean fewer returns available to be reinvested, whereas a lower EAC may mean that there are more returns available to be reinvested. The EAC is just one factor to consider when comparing service providers. Feel free to make use of the 10X EAC calculator to compare service providers, another feature part of our free online suite of tools.  

10X makes use of a low-cost and transparent fee structure, which is easy for investors to understand. Fees charged on retirement products are usually 1% or less. We use an index tracking investment strategy alongside a more active approach to asset allocation, geared towards long-term returns that produce the investment and retirement outcomes our clients deserve. Please visit our website for the most up-to-date fee information. 

Lifestyle goals beyond basics  

While a preservation fund should, first and foremost, cover your essential needs, it can also play a key role in helping to achieve the lifestyle you aspire to. Retirement can be about more than just covering living expenses; it can be an opportunity to try new experiences, chase personal goals and make meaningful contributions to your family or community.  

When planning for retirement, consider the broader possibilities of what your preservation fund could support. For example, you may want to travel overseas, try new hobbies or explore lifelong passions, all of which can be expensive. Some retirees may also wish to assist family members, such as children or grandchildren, by funding their education, helping them purchase a home, or just offering financial support in times of need. Your end goals can have a major impact on how you structure and manage your preservation fund.  

To make sure that you can reach these goals, you will have to evaluate factors like asset allocation, investment growth potential and the fees that you’re paying. Aligning your preservation fund with your retirement goals is key during your retirement planning.  

Final thoughts on preservation funds and lifestyle planning 

Preservation funds can be more than just saving for retirement, as they can also play an important role in the sustainability of your retirement lifestyle. A well-structured preservation fund can help you meet your lifestyle goals, giving you the freedom to live the retirement life that you desire.  

10X offers a cost-effective and transparent preservation fund focused on long-term returns. Get in touch today to find out more! Protect and grow your pension or provident fund savings in a 10X Preservation Fund.