Preservation funds: Why even modest pension or provident savings should be preserved

Often, we see investors with a modest amount invested in their pension or provident fund not feeling it’s worthwhile to reinvest these savings in a preservation fund when they change jobs. They feel that it won’t make a difference to their savings or retirement outcomes in the long run, as the amount seems too small. This perception is common, particularly among early-career employees or those who change jobs frequently. Yet, these small balances have the greatest long-term potential, as they have decades to potentially compound and grow.

The truth is that a small amount, when preserved, can actually grow into a noteworthy amount when compounded over the long term, which may then result in significant retirement income for you. In this article, we will spend some time looking at the benefits of preserving your savings, even when the capital is on the smaller side, as well as the importance of asset allocation and investment strategy when it comes to your preservation fund.

Preservation funds: A recap

A preservation fund is a key long-term retirement savings vehicle that allows you to preserve your savings that have been previously invested in an employer-sponsored pension or provident fund. This capital can then be transferred to a preservation fund without triggering a tax event.

You will need to ensure that your provident fund is transferred to a provident preservation fund and that your pension fund is transferred to a pension preservation fund. Growth within the preservation fund is tax-free, allowing for more returns to potentially be reinvested and allowed to grow over the long-term.

Further contributions are not allowed when it comes to preservation funds. You would, instead, look at factors such as your asset allocation and fees when aiming to maximise growth within your preservation fund. From the age of 55, you are able to use your preservation fund savings for an annuity. You may select either a life or a living annuity that will then provide you with a retirement income.

Preservation funds: The Two-Pot Retirement system

The Two-Pot Retirement System was introduced in South Africa by the National Treasury in September 2024. This system changes the way that preservation fund contributions and withdrawals are treated. With the implementation of this new system, all contributions are split between two pots, namely, the ‘savings pot’ and ‘retirement pot’. One-third of contributions will be allocated to the savings pot, and two-thirds of contributions will be allocated to the retirement pot. There is also a third pot called the “vested pot”, which only applies to preservation funds opened prior to September 2024.

Withdrawals are allowed from only the savings pot once per year for a minimum amount of R2,000. Withdrawals will be taxed at your marginal tax rate, and there will also be an administration fee charged. Withdrawals should be avoided, if possible, to get the most out of your preservation fund. You would instead look to keep your savings invested, allowing them to potentially grow and compound over time. The retirement pot capital will remain invested until retirement age, which is from age 55 in South Africa.

Any further contributions to a preservation fund are not permitted; the savings component of the preservation fund will grow at the same rate as the total fund. If your total fund grows by double the size, then you will see both the savings pot and the vested pot also grow by double the size. Please consult the latest FSCA guidance on the Two-Pot Retirement System.

Why small balances get cashed out

There are plenty of reasons why people choose to cash out instead of continuing to preserve their savings, these include:

Psychological biases at work

Present bias: This bias focuses on the notion that instant gratification or rewards outweigh the importance of future potential benefits. This may result in you wishing to withdraw your savings now instead of preserving them and allowing them to potentially grow over time.

Underestimating compound growth: The power of compound growth can often be underestimated. This is a formidable tool when it comes to your investing and the potential growth of your capital over time, and ultimately the capital that you may have available at retirement. You should use a preservation fund calculator to understand this power fully.

The career transition effect

A job change can bring with it financial stress, particularly if you find yourself between roles. This may increase the temptation to withdraw your pension savings instead of preserving them in a preservation fund. The long-term cost of not investing your pension or provident fund savings should always be an important consideration when making decisions.

Compounding explained simply

Compound growth may potentially result in more long-term growth of your capital as it entails growth on growth. If you think about your preservation fund, all returns generated are reinvested, and there is growth on your initial capital, plus growth on all of the returns generated. It’s easiest to imagine this as a snowball effect.

Let’s look at an example to help illustrate the power of compounding:

In the first scenario, you start with a R1M lump sum and generate 6% real return (after fees and inflation) over 10 years.

In the second scenario, you start with a R1M lump sum, but start your investment 20 years earlier; in other words, the money remains invested for a total of 30 years, with the same 6% real return.

In Scenario 1, you end up with approximately R1.73m

In Scenario 2, you end up with approximately R5.22m

The time that you have available for investing should be fully utilised in order to look to maximise the potential compound growth of your preservation fund capital. Please note that this example is for illustrative purposes only, and real results may vary.

Why preservation matters even more for small balances

Smaller balances are often the most vulnerable to withdrawal because they feel less consequential. But these balances often represent earlier contributions, so they have the longest remaining investment horizon. Preserving your savings, no matter how small, means you allow it to fully benefit from the compounding effect over time, rather than interrupting growth at its most powerful stage.

The role of asset allocation

Asset allocation is crucial when it comes to your preservation fund. Asset allocation plays the biggest role in the performance of your preservation fund, accounting for over 90% of returns, as seminal research from Brinson, Singer and Beebower shows. As you aren’t adding any further contributions, a big focus should be placed on asset allocation as a potential excellent driver of long-term returns. The usual assets that you would look to diversify your portfolio across would be: equities, real estate, bonds and cash.

At 10X, you’ll have the freedom to adjust your underlying portfolio by choosing from a selection of carefully curated funds, suited to different investor profiles. These funds have been carefully selected and focus on long-term growth and returns. Aligning your asset allocation with your investor profile and long-term financial plan is advised, as well as tweaking this in order to cater to changing needs over time. Your asset allocation is especially important as you can no longer make contributions to the fund, so the growth of the portfolio depends entirely on how well the existing capital is invested. Explore our funds page for the most up-to-date fee information. This is correct as of the 4th of February 2026.

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), as data suggests, but past performance doesn’t guarantee future results. Keep in mind, though, that equities are also the most volatile of the asset classes.

Real estate or property can generate some good returns as well. Bonds will add more stability to your portfolio, but they are also likely to generate some lower returns. This, however, does not mean bonds will never perform, merely that it is seen as a more conservative option. Cash is the most stable and liquid of the asset classes, while also likely to generate the lowest returns.

You may also look to diversify your portfolio offshore. The international market can provide some good opportunities as well as a hedge against any local market instability and depreciation of the Rand.

Your preservation fund is governed by The Pension Funds Act, meaning that there is a limit placed on how much of your portfolio you may invest in equities and offshore. You are allowed a maximum of 45% offshore and 75% in equities.

Fees: The silent erosion of small savings

High fees may have the effect of reducing your capital; this is especially true when fees are compounded over the long-term. A small difference in fees, when compounded over time, can have a notable impact on your preservation fund and retirement outcomes. By keeping costs low, more of your savings remain invested and continue potentially compounding over time.

Let’s have a look at some of the fees that you may see charged on your preservation fund:

Administration fees: Fees will be charged for the administration of the fund. This will relate to tasks such as compliance, reporting, and tax.

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

Advisor fees: An advisor will charge an initial and an ongoing fee for the advice and services that they offer.

Let’s have a look at an example which highlights the effect of fees over the long-term. We will compare fees of 3% with fees of 1%.

Let’s assume the following factors for our example:

• Investment period of 30 years
• Investment of R500,000
• Return of 12% per annum
• An inflation rate of 6%

Example 1 (1% Fees): Real investment value is R1,992,890

Example 2 (3% Fees): Real investment value is R1,155,018

As this example shows, a small difference in fees can significantly affect your real investment value. This example is for illustrative purposes, and real results may vary.

10X uses a low-cost and transparent fee structure which is simple for all investors to understand. Fees charged on retirement products, such as preservation funds, are usually 1% or less, depending on the amount that is invested and the selected product. Please explore our products for the most up-to-date fee information.

What happens if you cash out instead?

If you instead decide to cash out, you will need to pay tax on this withdrawal according to the SARS withdrawal tax tables. Please see below the tax table, which has been taken from the SARS website.

On the other hand, if you decide to preserve your money until retirement, you will be taxed according to the SARS retirement tax tables, which allow for the first R550,000 to be tax-free.

By withdrawing, you will lose out on this potential opportunity to grow and compound your employer-sponsored pension or provident funds, as you have been doing prior to changing roles. It can be very difficult to “catch up” on this lost time, so if the opportunity presents itself to transfer your savings to a preservation fund in order to potentially grow your capital, it should be grabbed with both hands.

A better way to think about “small”

It can be useful to reframe the way you think about your “small” pension or provident savings. It may be small now, but when this is compounded over time, this “small” amount can become a decent amount of capital. Your retirement income will come from a variety of different sources, which will be used for your annuities during the retirement years.

These annuities will provide you with an income for your retirement. The more retirement savings you have, the more retirement income you will have available to fund your annuities. At 10X, we offer a transparent and low-cost preservation fund that focuses on superior long-term returns for investors.

Final thoughts on preservation funds

Preserving your savings, even if they seem small, can help to grow and improve your retirement outcome. Making use of time and compound growth can help to move your “small” pension or provident fund into a decent amount of capital once preserved in your preservation fund. As always, low fees and a strategic asset allocation are key factors to consider when it comes to preservation funds.

To find out more about making use of a preservation fund, please get in touch with the skilled and helpful investment consultants at 10X. We’re here to help you secure your future!