Preservation funds: Navigating retirement savings when changing jobs

A preservation fund is a retirement savings investment vehicle designed to assist individuals changing jobs to transfer and potentially grow savings from a pension or provident fund. The South African job market is fluid, with many South Africans looking to change jobs as an opportunity to increase their earning potential or gain more experience in related fields. If you change jobs, there is the question of what to do with your retirement savings. 

A preservation fund is an excellent tax-efficient vehicle as it allows you to ‘preserve’ your retirement savings, allowing them to continue growing for your retirement years. This article will explore preservation funds in greater detail, looking at the benefits, considerations, and the steps to take when initiating a transfer to a preservation fund. 

An overview of preservation funds  

A preservation fund is a tax-efficient retirement investment vehicle that allows you to preserve your retirement savings. These savings are transferred from your pension or provident fund when changing jobs. This allows the savings to continue accumulating and potentially grow, as has likely been the case with your pension or provident fund.  

Your savings can be transferred to a preservation fund without triggering tax. Keep in mind that when transferring savings, you need to transfer your pension fund to a pension preservation fund, and your provident fund to a provident preservation fund. If you instead decide to withdraw funds, you are potentially impacting the growth of your capital and the funds that you will have available to you upon retirement.  

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Preservation funds are used to keep retirement savings on track despite job changes. They are tax-efficient, flexible, and allow you to consolidate savings from multiple employers over time. Note that while you can have several preservation funds invested in the same underlying portfolios with the same provider, you can’t add savings from multiple pension or provident funds into a single preservation fund. The rule is one preservation fund per pension/provident fund.  

Why job changes trigger retirement decisions  

Resignation or dismissal means that you will need to make some decisions regarding what to do with any employer-linked pension or provident funds that you may have. It can be extremely tempting to withdraw funds, especially if you are experiencing financial pressures or are between jobs. Withdrawing your savings may lead to having less money available to you upon retirement, as your savings would not have had the opportunity to grow and take advantage of compound growth over time. It’s important not to make any emotional decisions that may impact your retirement funds and retirement plans in the long term. 

Options when leaving a job: Cash out vs preserve  

If you’re leaving a place of employment where you have a pension or provident fund, you’ll need to make a key decision. You have to decide between cashing out and preserving your savings. We discuss each of your options below.  

Option 1: Cashing out

If you decide that you need to cash out your preservation fund when leaving your employer and before retiring, you will be taxed according to the retirement benefits lump sum tax table. This means that only the first R27,500 will be tax-free.  

The tax applied will be as follows (These have been taken from the SARS tax tables):     

• Withdrawals between R27,501 and R726,000 - a tax rate of 18% of taxable income above R27,500   

• Withdrawal between R726,001 and R1,089,000 - tax of R125,730 plus 27% of taxable income above R726,000  

• Withdrawal exceeding R1,089,000 - charge of R223,740 in tax plus 36% of your taxable income above R1,089,000 

 This decision should not be taken lightly, and you should carefully consider the consequences of withdrawing your savings early. 

Option 2: Transfer to a preservation fund

By opting to transfer your pension or provident funds to a preservation fund, you can keep your savings invested, allowing them to potentially grow and compound over time. You will not need to pay tax on this transfer, and you will also have control over the underlying funds where your capital will be invested.  If you choose to transfer to a preservation fund and keep your savings invested, you can maximise the potential long-term growth of your savings. This can help you accumulate enough savings to potentially last throughout your retirement years. A preservation fund is, therefore, an incredibly valuable tool for those with multiple employers throughout their lifetime. Preservation funds promote disciplined and sustainable retirement planning. 

The role of the Two-Pot Retirement System 

The Two-Pot Retirement System was implemented in South Africa in September 2024 in an effort to allow South Africans access to a portion of their savings in emergencies while still prioritising long-term retirement planning. This implementation has changed the way that withdrawals operate. Under the new regulations, all contributions made to retirement products are split one-third to the ‘savings pot’ and two-thirds to the ‘retirement pot’.   The savings pot can be accessed once per year, minimum withdrawal amount must be R2,000. These withdrawals will be taxed at your marginal tax rate and will also include an administration fee. The retirement pot is to remain untouched until retirement, which is currently age 55.   

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There may also be a ‘vested pot’, referring to all funds invested before September 2024. The old rules, which were in place before September 2024, apply to the vested pot. These allow for one withdrawal before retirement. If you resign from your employer, you may be eligible to withdraw the entire vested pot, subject to applicable tax implications. The best practice, however, is generally to transfer the funds to a preservation fund where they can continue to potentially grow and eventually provide for your retirement.  

 Preservation funds are less affected by the Two Pot Retirement System when compared to other retirement savings vehicles, as no further contributions can be made. For example, retirement annuities can continue to receive contributions, which will now be split one-third and two-thirds between the two pots.   

Preservation funds are affected differently; the savings component of the preservation fund will instead grow at the same rate as the total fund. If the total fund grows by three times its size, both the savings pot and the vested pot will also grow by triple their size. Only new retirement fund contributions post-September 2024 fall under the two-pot system, and preservation funds are generally not subject to split contributions because they don't accept new ones.  For the most up-to-date information regarding the Two-Pot system, please consult the latest FSCA guidelines. 

Key considerations when choosing a preservation fund 

When selecting a preservation fund, you want to consider a few factors. Let’s look at these factors in further detail: 

Fees 

People often underestimate the impact that fees can have on a preservation fund’s growth. Fees play a major role, and you should always make sure that you’re aware of all fees being charged on the preservation fund. Higher fees may mean that less of your returns can be reinvested and potentially grow over time, while lower fees will allow for more of your returns to be reinvested.   

The Effective Annual Cost (EAC) of an investment is the total cost that is included in owning an investment over a one-year period of time. This is a standard metric that was introduced in 2015 by ASISA. It includes the total annual expenses associated with an investment product. These are costs including investment management fees, advisor fees, administration charges, and other charges.  

• Investment management fees: These are the fees charged for the management of the fund. 
• Advisor fees: The fees paid by advisors for their services. You may see both an initial and annual fee charged. 
• Administration fee: The fees charged for any administrative tasks, such as tax and compliance activities.  
• Other charges: Such as early withdrawal penalties or any other applicable fees. 

 All things equal, a higher EAC results in less of your returns being invested whereas a lower EAC may result in more of your returns being reinvested and compounded over time. For this reason, it’s important to choose a provider with transparent and low fees. Here is a link to a free EAC calculator, which is part of a suite of online tools provided by 10X. This tool allows you to see the potential costs charged by 10X, which you can then compare to the costs charged by your current service provider.   

As an investor, you should carefully consider the difference between fund performance and net investment returns. The fund performance is indicative of the total returns generated by the underlying investment fund, based on market trends and the effectiveness of the fund’s strategy. The fees that you are charged will not directly influence fund performance, but they do reduce the amount of return that you receive. The net investment return is what remains after deducting fees. You will then also need to consider the impact of inflation on real value.  

Let’s look at a straightforward example. In this example, we will compare 1% in fees versus 3% in fees with an inflation rate of 6%. If you invest R100,000 and the fund returns 12%, the value of the investment sits at R112,000.  

Scenario 1 (1% in fees): With fees set at 1%, you need to pay R1,120. Your return is therefore R10,880, which then needs to be adjusted for inflation. The actual value of the money in real terms is approximately R5,600.  

Scenario 2 (3% in fees): With fees set at 3%, you need to pay R3,360. Your return is therefore R8,640, which then needs to be adjusted for inflation. The actual value of the money in real terms is approximately R3,360.  

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We can see how a small difference in fees can make a big difference overall. When these fees potentially compound over time, they have even more of an impact on your final returns. Note that the above example is for illustrative purposes only, and actual results may vary. To learn more about how fees impact growth, follow this link.  

Investment strategy and asset allocation 

As an investor, you have flexibility in terms of the underlying assets that your funds are invested in. These underlying funds allow you to diversify across multiple asset classes, such as equities, bonds, real estate, and cash. You should select your underlying funds based on your risk tolerance, financial requirements, and time horizons. 

If you are more risk-tolerant, you may wish to select a higher percentage of equities. If you are more risk-averse, you may wish to include a higher percentage of bonds in your portfolio. Equities are the more volatile of the asset classes, but may offer better returns. Bonds add more stability to a portfolio, but they may result in lower returns.  

10X offers a range of carefully selected funds with exposure to a range of the different asset classes, each suited to different investor profiles. To read more about the funds on offer at 10X, follow this link. 

Provider transparency and historical returns 

It’s important to choose a transparent service provider who has easy access to statements, customer support, and an easy-to-navigate online portal, allowing you to transact and make changes to your investment, as required. You should be aware of all fees and have a clear idea of the investment strategy.  

 The fund’s past performance should also be considered. Researching past performance and historical returns can be a useful guideline as to the potential returns of the fund. Keep in mind that past results do not guarantee future results. 

Index tracking vs active management investment strategy 

An active investment strategy involves the work of fund managers in an effort to research and pick the stocks that they believe will produce the best returns. This approach involves more costs related to activities such as research, analysis, and buying and selling. An index tracking investment strategy matches an index such as the S&P 500 and aims to achieve the same returns as that index, resulting in a more cost-effective strategy.   

10X offers a transparent, low-cost preservation fund that aims for superior returns over the long term. We make use of an index tracking investment strategy with a more active approach to asset allocation, which allows us to be more competitive with the fees that we charge. Up-to-date information on the fees charged by 10X can be found on our website or from our knowledgeable investment consultants. To find out more about the 10X preservation fund in general, follow this link. 

How to transfer your funds and avoid penalties  

These are the steps involved in the transfer of your pension or provident fund to a preservation fund.  

1. Complete the necessary withdrawal forms and obtain any quotes from your current employer-linked pension or provident fund 
2. Complete the new application form for your preservation fund 
3. Submit both sets of forms and supporting documents (a copy of ID, proof of address, and proof of bank account are common supporting documents required) to both your current employer and your new service provider. 

Note: Section 14 transfers can take up to 6 months to complete 

Summary of preservation fund benefits 

To sum up, there are several benefits you gain from transferring your pension or provident fund to a preservation fund.   First and foremost, transferring your funds to a preservation fund allows you to continue to potentially grow your retirement savings over the long term, while taking advantage of compound growth. The lump sum funds from your pension or provident fund can be transferred, tax-free, to your preservation fund.   

The growth within your preservation fund is also tax-free. Additionally, you have flexibility in terms of the service provider that you choose to place your savings with, as well as flexibility with the underlying funds that you select. Upon retirement, you can then purchase a life or living annuity, which is designed to provide you with an income through your retirement years.  

Conclusion: Preservation funds when changing jobs  

Changing jobs is a major life event, and what to do with your pension or provident savings at this time requires careful consideration. Transferring your funds across to a preservation fund is a crucial decision that could really change your long-term savings outcome and potentially your retirement. It’s important to educate yourself on your preservation fund options and opt for low-fee providers who resonate with your needs.  

If you’ve recently changed jobs and need assistance with your pension or provident fund savings options, don’t hesitate to get in touch with the experienced and helpful investment consultants at 10X. We believe in low fees and a straightforward approach, and our track record of superior returns speaks for itself. Reach out today!