Preservation funds: Balancing growth, risk, fees, and time

A preservation fund is a retirement savings vehicle that allows you to transfer savings from a pension or provident fund when you leave a job, without triggering tax penalties. As an investor, there are four variables to look at to maximise the potential growth of your preservation fund. These four variables are growth, risk, fees and time. Each of these factors plays an important role in the success of your fund over the long term.   

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10X simplifies your retirement with a straightforward investment approach, low fees and an exceptional track record. This article will delve deeper into the four factors that influence preservation funds and the importance of looking at all four factors in tandem when planning and reviewing your preservation fund. 

Quick refresher: What is a preservation fund? 

A preservation fund is a tax-efficient retirement savings vehicle which allows you, as an investor, to continue your savings funded by an employer-sponsored provident or pension fund after changing jobs or when you are between jobs. Your savings may be transferred to a preservation fund without triggering any tax penalties, as long as a pension fund is transferred to a pension-preservation fund and a provident fund is transferred to a provident-preservation fund. A preservation fund does not allow for further contributions, so it relies on growth generated by investment returns.   

Preservation funds are also governed by Regulation 28 of the Pensions Fund Act. This puts a cap on the percentage of your fund which you may invest offshore, as well as the percentage of your fund that you may invest in equities. The idea behind Regulation 28 is to help protect investors against poorly-diversified portfolios. As per current Regulation 28 rules, you can invest 45% of your retirement money offshore and 75% of your retirement savings in equities.  

How the Two Pot Retirement System affects preservation funds 

The Two Pot Retirement System was implemented in September 2024. This has changed the way that retirement product withdrawals are governed in South Africa. This system now splits contributions between a ‘savings’ and ‘retirement’ pot. Two-thirds of contributions are invested in the retirement pot, and one-third of savings are invested in the savings pot. There is also a third pot which is the ‘vested’ pot. The vested pot refers to all contributions made before September 2024, and the old rules apply to this pot.   

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You are allowed one withdrawal prior to retirement from your vested pot. You aren’t allowed to access your retirement pot until retirement age, which is age 55 in South Africa. These savings will then be used for purchasing either a life or living annuity. The savings pot allows for one withdrawal per year, for a minimum amount of R2000. Withdrawals are taxed at your marginal tax rate and are also subject to an administration fee. It is best to keep your money invested and only withdraw in an emergency, if possible.  

Preservation funds are not as affected by the Two Retirement System compared to other retirement savings products, due to the fact that no further contributions are allowed. The savings component of the fund grows 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 FSCA guidance document for the most up-to-date information on the Two Pot Retirement System. 

Growth and risk: The engine of long-term returns 

Since you won’t be making any additional contributions to your preservation fund, it’s important to focus on maximising your investment growth to build your retirement savings. Your investment returns have the potential to grow and compound over time, which is key to building value in the fund. A major influencing factor is the asset allocation of your fund. This refers to the way your savings are distributed across different types of investments. This typically includes equities, bonds, property and cash. Your risk tolerance, investment goals and time horizon are all key factors when deciding on a fund.   

Each of the different asset classes has different characteristics. Equities may generate the best returns in the long term, albeit being the most volatile of the asset classes. We see that they 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); however, past performance does not guarantee future results. Bonds will add some stability to a portfolio, but they may generate lower returns. Real estate can be a good hedge against inflation. Cash is the most stable of the asset classes but is also likely to generate the lowest returns.  

Diversifying across the asset classes is an important step in taking advantage of gains in certain asset classes whilst mitigating against losses in other asset classes. You may also look to invest offshore to further diversify your portfolio, in an effort to boost returns and take advantage of international opportunities, while adhering to Regulation 28 limits. 

10X offers a number of carefully curated preservation funds. Each of these is suitable for different investor profiles and risk tolerance levels. Find out more about the funds on offer at 10X here. 

Fees: The silent drag on compounding  

Investors often overlook the impact that fees can have on investments. Higher fees can impact the capital growth of your money, especially when compounded over the long term. Lower fees, on the other hand, may result in there being more returns available to be reinvested, allowing your money to potentially grow more effectively through compounding.  

You should always be informed of the Effective Annual Cost (EAC) of your investment, so you can make changes if necessary. The EAC is a standardised measure which was introduced by ASISA in 2015. It allows you, as an investor, to see the total costs and fees involved with owning an investment over a one-year period of time. You can then compare these costs and fees with those charged by other service providers. 10X offers a free EAC calculator as a part of our online suite of tools.  

All factors being equal, a lower EAC means that more of your investment remains invested and is able to generate greater returns in the long term. A higher EAC may mean that there will be less returns reinvested and available to potentially compound and grow over the long term. However, costs should be just one factor to consider when choosing a service provider.  

You can expect to see the following fees charged on your preservation fund: 

Administration fees: These are the fees charged for the administration of the fund. This could be for tasks related to compliance, reporting and tax. 

Advisor fees: These are the fees charged by an advisor for their advice and services. There may be both an initial and an ongoing fee charged. 

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

Other: These may be charges such as early exit penalties which may apply to certain products. 

Let’s look at an example to explain the effect of high fees on your preservation fund. We’ll compare fees of 3% and 1%. Let’s assume the following factors: 

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

Example 1 (1% Fees): The real investment value is approximately R398,500. 

Example 2 (3% Fees): Real investment value is approximately R231,000. 

As this example shows, a difference of 2% in fees can have a significant impact on the real investment value of your preservation fund, especially when this is compounded over time. This example is for illustrative purposes only, and actual results may vary. 

Service providers who make use of a passive investment strategy are often able to be more cost-effective. This is because there are fewer costs involved with index tracking, such as less research, analysis and buying and selling costs. A more active investment strategy entails more costs due to the higher number of activities involved with it. These higher costs may then be passed onto the investor, which results in higher fees being charged. 

10X offers transparent, low-fee products. We make use of an index tracking strategy, with a more active approach to asset allocation decisions whilst focusing on the long-term returns of our clients’ investments. Our fees are less than 1% for most retirement products, although this does depend on the product chosen and the amount invested. To find the most up-to-date information on our fees, please visit our website or speak to our knowledgeable investment consultants here. 

Time: The most powerful (and underappreciated) variable  

Time is a powerful tool to have as an investor. The longer that your money stays invested, the higher the chances of you benefiting from the compounding of returns. This is where your investment earns returns on both your original capital and the returns you’ve already generated. Over time, this will significantly increase the value of your preservation fund. When you stay invested instead of withdrawing early, you can maximise the potential long-term growth of your preservation fund.  

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You should also avoid any emotional decisions and view investing as a long-term game, where compound growth can work in your favour. Market volatility is to be expected, but you should avoid reacting impulsively and instead consider your long-term strategy. You should allow your fund to recover from any short-term volatility in the market by giving it time instead of locking in any losses that may have occurred.  

Patience and discipline are key parts of maximising long-term investment outcomes, especially with preservation funds, as no more contributions are allowed. We can, therefore, clearly see the importance of time when it comes to getting the most out of your preservation fund.  H2: How these four elements interact Let’s have a look at how these four elements work together and impact each other: 

• Growth vs. Risk: In order to pursue growth, you will need to take some risk in your portfolio.  
• Risk vs. Time: You will be more risk-tolerant if you have a longer time horizon for your preservation fund.  
• Fees vs. Growth: Higher fees may reduce the long-term growth of your preservation fund, especially when compounded over time. This may mean that you will need to ensure greater returns. 
• Time vs. Fees: Fees compound over time, so the longer your investment horizon is, the more impact fees may have on your preservation fund.  

Building your strategy  

It’s important to carefully consider these four variables when planning your preservation fund. There are a few crucial questions to ask yourself regarding them. Let’s have a look at these in a bit more detail: 

• Time: What are the timelines you are working with? How many years do you have before retirement?  
• Risk: How risk-averse or risk-tolerant are you? Are you comfortable with market volatility and potentially making a loss in the short term?  
• Fees: Are you aware of your EAC, and what are the fees that you are paying?  
• Growth: How have your returns been over the last 1 year, 3 years, 5 years? Are you beating inflation? 

Once you have looked at these factors in a bit more detail and you have a better picture, you can use this information to plan and structure your preservation fund. You want to ensure that your asset allocation is properly structured and aligned to your risk tolerance levels and your timelines at hand. You also want to review your EAC regularly to make sure you are aware of all the costs and fees that you are being charged on your preservation fund. As always, keep in mind that investing is for the long term and you want to avoid any knee-jerk decisions. 

Final thoughts on preservation funds 

In order to optimise your preservation fund, it’s important to properly understand and manage growth, risk, time and fees efficiently. You need to know where you stand on each of these points and ensure that you are aligned with your investor profile and goals.  

Regular reviews will ensure that you stay on track with your retirement goals and allow you to make informed changes as required. Get in touch with 10X today and benefit from low fees, a superior track record and a long-term strategy that puts your future first!