legislation / retirement-planning / general-investing

Preservation Funds in South Africa: How they work for you

8 July 2024

Preservation funds present an ideal savings vehicle for individuals working towards building their retirement savings, particularly for those in a transitional stage of their professional lives and for those anticipating job changes before they reach retirement age. In the event that you change employers or face a change in your employment status, preservation funds allow you to retain the retirement savings you have built up in your existing pension or provident fund, with added benefits of tax advantages and continued investment growth. 

There are important considerations to be made with regards to your pension (and how it might provide an income for you in retirement) when your professional circumstances change – particularly when it comes to deciding whether preserving, cashing out, or what mix of the two is the right option for you. This blog will expand on the long-term difference between preserving and cashing out, the significant advantages that preservation funds can bring to your own savings plan, and why 10X Investments is the leading option for South Africans saving and investing towards a comfortable retirement.

preservation fund calculator

Understanding Preservation Funds

A preservation fund is a type of retirement savings vehicle. They are specifically intended to help working individuals retain and grow their retirement savings when leaving an employer by allowing the savings that are held in the individual’s occupational fund (i.e. a pension or provident fund) to be preserved and grown after the job transition, rather than withdrawn early. Preserving your pension or provident fund savings allows that capital to continue growing, and because you cannot withdraw until the minimum retirement age at least (55 in South Africa) you are giving the wonder of compound interest the best chance possible to give you the retirement you deserve. At 10X Investments, the process of transferring pension or provident savings into  a preservation fund would follow these steps:

Transfer of Funds

When leaving your employer, you are able to transfer the retirement savings you accumulated in a pension or provident fund through your employer from the existing pension or provident fund into a preservation fund as a lump sum contribution. Both your employer and the preservation fund provider will ask you to fill in forms relating to the transfer, and both should keep you updated on progress.

Fund Selection

The preservation fund provider will usually have a range of funds into which your savings can be invested, and although they are the experts and will likely have a good idea of the best place for your money to grow, you are also able to decide what mix of underlying assets you prefer and choose the best fund to reflect that. In selecting a fund, you would consider your financial goals, time horizon, and risk tolerance to choose the best option for your investment and future income needs.

Lump Sum Contribution

Usually, your previous pension or provident fund provider will be able to transfer the lump sum directly into your 10X Preservation Fund. This lump sum contribution is tax exempt (as long as your savings are being moved from a pension fund to a pension preservation fund, or from a provident fund to pension or provident preservation fund). The 10X Investments minimum lump sum contribution is R50,000.

Capital Growth

From here, your preservation fund will be allowed to grow through investment returns and the compound growth of those returns being reinvested. No tax is payable on the growth of your capital, which further boosts the effect of compound growth on your fund. 

Preservation funds are primarily designed to safeguard your retirement savings by allowing you to protect and invest your pension upon leaving a place of employment. By deciding to partner with 10X Investments for your preservation fund, you can invest your money into a diverse range of assets, via funds with historically superior returns. You can read more on our funds further down.

Considering changing providers? Visit our Cost Comparison Page for a free analysis of how you could be getting more from your retirement investments with 10X’s low fees and superior returns.

comparison report living annuity retirement annuity

Preserving Retirement Savings vs Cashing Out

The biggest consideration when it comes to your accumulated pension savings is the initial decision of whether to preserve or cash out. Let’s use the example of Max and Aaliyah in comparing the preservation of funds versus cashing out to purchase a car, and what happens to the relative value of their respective assets – Max’s preservation fund versus Aaliyah’s car – over time, assuming their monthly costs are the same to simplify the comparison.

Max decides to continue to grow his money in a preservation fund. Rather than purchase a vehicle, Max uses Uber to get around. His Uber costs equate to R3,000 per month. His preservation fund has an annual return of 5%.

Aaliyah decides to cash out and buy a car. Her fuel and maintenance costs also equate to R3,000 per month, but the value of her car depreciates at a rate of 15% annually.

Max’s fund continues to grow at an annual rate of 5%, while Aaliyah’s car depreciates by 15% each year. We can do some calculations to learn how Max and Aaliyah’s decisions affected the value of their assets after 5 years, assuming that Max’s initial fund contribution and Aaliyah’s car value are both R500,000 respectively.

Year 1
Max’s fund: 
R500,000 × 1.05 = R525,000
Aaliyah’s car value:
R500,000 × (1−0.15) = R425,000
Year 2
Max’s fund:
R525,000 × 1.05 = R551,250
Aaliyah’s car value:
R425,000 × (1−0.15 )= R361,250
Year 3
Max’s fund:
R551,250 × 1.05 = R578,812.50
Aaliyah’s car value:
R361,250 × (1−0.15) = R307,062.50
Year 4
Max’s fund: R578,812.50 × 1.05 = R607,753.13
Aaliyah’s car value:
R307,062.50 × (1−0.15) = R260,003.12
Year 5
Max’s fund:
R607,753.13 × 1.05 = R638,140.78
Aaliyah’s car value:
R260,003.12 × (1−0.15) = R221,002.65

After 5 years, Max's preservation fund grows to R638,140.78. On the other hand, Aaliyah's car depreciates to R221,002.65.

This example demonstrates the long-term return on investment of cashing out to purchase an asset, in Aaliyah’s case, a car, compared to allowing your capital to grow in a preservation fund like Max did. Aaliyah’s ultimate asset value is less than half of her original R500,000, while Max’s funds have continued to grow.

10X Investment’s Diverse Preservation Fund Offerings 

When it comes to preservation funds, you might have seen the word ‘wrapper’ used occasionally. A wrapper describes an investment vehicle that encloses (or ‘wraps’) underlying investments within a specific legal and tax structure. A preservation fund is one kind of wrapper, as it provides a structured environment for retirement investments which includes legal protections, tax benefits, and investment management.

Within 10X’s preservation fund, there are a number of underlying investment funds that you can  choose from, with each catering to different investment needs and reflecting a different mix of assets (or ‘asset allocation’).

First, let’s take a look at our flagship offering: the 10X Your Future Fund The 10X Your Future Fund is aimed at providing long-term capital appreciation through a diversified mix of local and international assets. It has a higher allocation to growth assets, like equities and property. This fund has a high risk profile, an ideal time horizon of 5 years or longer, and 12.1% annualised returns since its inception. It is an ideal selection for investors with a long-term focus and a higher tolerance for market volatility. It is also Regulation 28 compliant, ensuring adherence to South African retirement fund investment regulations. 

Aside from being a R19.1 billion multi-asset high equity fund that consistently outperforms market benchmarks and offers you exposure to a diverse range of asset classes and geographies, the 10X Your Future Fund also has a low, transparent fee structure (and no performance fees – see below for fee structure). 

First R500,000: 1.04% per annum (including VAT)

Next R500,000: 0.92% per annum

Next R4 million: 0.81% per annum

Next R5 million: 0.58% per annum

Above R10 million: 0.40% per annum

Trading Costs: Between 0.12% and 0.18% per annum depending on the specific fund

But how does the 10X Your Future Fund compare in terms of performance? We’ll use ASISA and market benchmarks to demonstrate:

Against the ASISA benchmark: The 10X Your Future Fund consistently outperforms against the ASISA South African Multi Asset – High Equity Category funds. The benchmark aims for a return target of CPI + 5.5%, which is a common measure for high-equity funds.

Against market benchmarks: The 10X Your Future Fund’s annualised return of 12.1% since inception marks it ahead of a number of traditional benchmarks. This includes outperforming the average returns of comparable high-equity multi-asset funds, which usually target returns slightly above inflation plus a premium (CPI + 5.5%).

Also important to consider is the cost-effectiveness of the 10X Your Future Fund’s fee structure. Lower fees directly contribute to higher net returns. With a 1.04% total investment cost per annum for investments up to R500,000 (with the fee percentage decreasing for larger investments), the Your Future Fund has fees considerably lower than the industry average where total fees can exceed 3% annually.

While the 10X Your Future Fund stands out for its robust performance, low costs, and diversified investment strategy, we offer a wide selection of funds to cater to various investor needs. Below is a breakdown of 10X’s other underlying funds:

10X Income Fund

This multi-asset income fund is designed to provide a high level of income and long-term capital stability. It focuses on a diverse range of local and international interest-bearing assets, has a high risk profile, an ideal time horizon of 3 years or longer, and has seen 8.4% annualised returns since inception.

10X Moderate Fund

This multi-asset medium equity fund is suited for investors seeking capital growth with lower volatility than a high equity investment portfolio. It includes a mix of growth assets (shares and property) and defensive assets (bonds and cash). It has a medium risk profile, an ideal time horizon of 3 years or longer, and 10.8% annualised returns since inception.

10X Defensive Fund

This multi-asset low equity fund focuses on capital preservation with a lower risk profile. It includes investment in more defensive assets such as bonds and cash, with a smaller allocation to growth assets and a short to medium term time horizon.

10X Money Market Fund

The 10X Money Market Fund provides a high level of capital stability and a focus on short-term interest-bearing instruments. It comes with a low risk profile and a short-term time horizon. 

Each 10X Fund is designed with specific investment goals, risk profiles, and time horizons in mind to cater to a variety of different investment management preferences and life stages. In summary:

  • The 10X Your Future Fund is ideal for long-term growth with high risk tolerance.
  • The 10X Income Fund is best suited for income-focused investors seeking stability over the medium term.
  • The 10X Moderate Fund is ideal for medium-term growth with moderate risk.
  • The 10X Defensive Fund is suited for conservative investors who prioritise capital preservation.
  • The 10X Money Market Fund is best suited for short-term investments that require high capital stability. 

For more detailed information to guide the decision of which fund best suits your needs, visit the Funds page on our website. 

Preservation Funds In Summary

There are numerous benefits to your decision to preserve, spanning tax advantages, flexibility in fund access, and the continuation of your retirement savings.

Tax advantages: Preservation funds come with tax benefits that further the growth of your savings over time – additionally, the growth of your investments within the fund are tax-free.

Flexibility in fund access: Preservation funds provide flexibility in how you manage your retirement savings, as they allow the transfer of funds from a pension or provident fund without tax consequences and the ability to select where your money is invested 

Continuation of retirement savings: Rather than halting the growth of your company-sponsored retirement fund when changing employers, preservation funds allow you to maintain the accumulation of savings towards your retirement.

For future preservation fund investors, we have a handy Preservation Fund Calculator to help you estimate the projected value of your preserved savings over time and prepare your savings plan accordingly.

A Few Risks To Consider

While preservation funds offer many benefits, there are some risks that potential investors should consider (as is the case with any investment decision). Firstly, it is important to note that once you transfer your retirement savings into a preservation fund, you cannot make any additional contributions following your initial lump sum contribution. This means you cannot keep paying into your preservation fund as you would with a retirement fund.

Secondly, early withdrawal from your preservation fund is not advisable, as the withdrawal would be subject to high tax rates; withdrawing more than R27,500 will incur a tax rate of 18% of taxable income above R27,500, with the tax rate increasing for larger withdrawal amounts. Further to this, you are only able to make one cash withdrawal before retirement.

With this understanding of preservation funds and how they would operate should you partner with 10X Investments, the major benefits of preservation funds and their advantages for job-changers become clear. Considering the tax advantages, continuation of retirement savings growth, and flexibility in investment options – along with 10X’s array of funds with consistently high returns and robust investment portfolios – investing your pension in a preservation fund may indeed be the best choice for your long-term financial goals. 

To apply for your own preservation fund, just fill out a quick contact form on our website and we’ll get back to you to start the process.

10X Investments is an authorised Financial Services Provider (FSP number 28250). The content herein is provided as general information and is not intended as nor does it constitute tax, legal, investment, or financial advice as defined by the Financial Advisory and Intermediary Services Act, 2002.

The 10X Living Annuity is underwritten by Guardrisk Life Ltd.

10X Fund Managers (RF) (Pty) Ltd is an approved manager of collective investments schemes in securities in terms of Section 42 of the Collective Investments Schemes Control Act, 45 of 2002.

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