Preservation funds: Should you ever withdraw money from your preservation fund?

A preservation fund is designed to protect and grow your retirement savings over time, helping you potentially build the capital you’ll rely on in your later years. But when dealing with financial pressure, it can be tempting to access your money before retirement.

While preservation funds do allow for limited access before age 55 (the earliest access age), withdrawing early can lead to significant consequences. You may face tax implications, and it may also reduce your ability to benefit from potential long-term compounding, which impacts your retirement outcomes.

In this article, we take a closer look at how preservation funds work, the rules around withdrawals and the potential long-term impact of accessing your savings early.

Understanding preservation funds

A preservation fund is a long-term retirement savings vehicle which allows you to transfer savings from your employer-sponsored provident or pension fund. Your capital can be transferred without triggering a tax event. The growth within the preservation fund will also be tax-free, which allows for more returns to be reinvested and potentially grow and compound over the long term.

You will need to ensure that your savings from your pension fund are transferred to a pension preservation fund and your savings from your provident fund are transferred to a provident preservation fund. It’s important to note that a preservation fund does not allow for further contributions. From the age of 55, you are able to transfer your savings to an annuity, either a life annuity or a living annuity, that will then provide you with an income for your retirement years.

Preservation funds and the Two Pot Retirement System

It’s vital to also be aware of the new rules regarding retirement products. The Two Pot Retirement System was implemented in September 2024. This has brought with it some changes regarding how retirement savings are structured and how withdrawals are handled.

Under the Two-Pot system, retirement savings are divided into three components. The retirement pot receives two-thirds of new contributions and is preserved until retirement. The savings pot receives one-third of new contributions and allows for limited access before retirement. And the vested pot includes all savings accumulated before September 2024, and remains governed by the old rules.

Preservation funds are slightly different. Since no new contributions can be made, the contribution-splitting rules are applied differently. Instead, your existing investment is divided into these components and each portion grows in line with the overall preservation fund’s performance. If your total investment grows, each pot will grow proportionally.

For the most up-to-date details regarding the Two-Pot Retirement System, consult the FSCA’s guidance.

The withdrawal rules

As mentioned above, there are now three portions, and different withdrawal rules apply to each of these.

The savings pot allows limited access, where you may withdraw once per year, subject to a minimum amount of R2,000. These withdrawals are taxed at your marginal income tax rate, and administration fees may also apply. The vested pot, governed by the old rules, allows for one withdrawal before retirement.

The retirement pot, on the other hand, is preserved strictly for retirement and cannot be accessed early. Upon retirement, this portion must be used to purchase an annuity, either a life or living annuity, which will then provide you with an income for your retirement years.

How withdrawals are taxed

If you do withdraw money from your preservation fund, the withdrawal will be taxed according to the withdrawal tax tables. This may then mean you are taxed more than if you wait until retirement to withdraw.

Please see the SARS withdrawal tax tables below, which have been taken from the SARS website:

Cash withdrawals from age 55 will be taxed according to the retirement lump sum tax tables. Please see below the retirement lump sum tax tables, as taken from the SARS website:

The value of staying invested

Ideally, you would want to keep your savings invested in your preservation fund, allowing for potential compounding and growth over the long term. This is even more important with preservation funds, as you are not able to add any additional contributions, so you are reliant on your funds' potential compound growth in order to grow your capital.

Market cycles are part of the investing game, and it’s important not to get distracted by short-term noise and instead focus on your long-term goals and financial plan. It’s normal to have volatility in the market, and this is where ensuring you have a strategic asset allocation in place is so important, allowing you to balance both growth and capital preservation.

Let’s look at an example to highlight the power of compound growth.

Let’s assume you have R200,000 in a preservation fund and leave it invested for 25 years, earning an average return of 10% per year. Over time, your investment could grow to approximately R2.17 million.

Now, let’s say you decide to withdraw R50,000 early on. Not only will you pay tax on that withdrawal, but you will also reduce the amount that can potentially benefit from compound growth over time. If you leave the remaining R150,000 invested under the same conditions, it would grow to around R1.63 million.

The early withdrawal of R50,000 could cost you over R540,000 in lost future value, even before accounting for tax.

This example shows how powerful compounding can be, and even a relatively small withdrawal today can drastically reduce your capital by the time retirement comes around. This example is for illustrative purposes only, and actual results may vary.

The role of asset allocation in preservation funds

Asset allocation plays an important role, especially as you are not able to add any further contributions, so any growth needs to come from your investment returns. 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.

You would select your asset allocation from the following asset classes: equities, real estate, bonds and cash. At 10X, you can adjust your underlying portfolio by choosing from a selection of carefully designed funds, each with a different mix of assets and geared towards different investor profiles.

Equities are considered the most volatile of the asset classes, and they are also likely to generate the best returns of the asset classes. 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), although past performance does not guarantee future results. Real estate can provide a good hedge against inflation, while bonds may produce some lower returns, but they will also add stability to your portfolio. Even though bonds are typically seen as a more conservative option, this does not mean they will never outperform expectations. Cash is the most stable and liquid of the asset classes, and it will also likely produce the lowest returns.

When it comes to your asset allocation, you should generally aim to focus on the long term and ideally balance both growth and stability. Your asset allocation should align with your long term financial goals, investment timelines and your risk profile. A well-diversified portfolio across the various asset classes can help to balance both risk and reward.

You may wish to diversify your portfolio offshore. This can provide a good hedge against local market instability and any possible depreciation of the rand. However, you will need to consider Regulation 28 of The Pension Funds Act. This puts a cap on the percentage of equities and offshore exposure you may have in your preservation fund. Current regulations state that you may have a maximum of 75% invested in equities and 45% offshore.

At 10X, we offer investors a wide range of funds that are well-diversified and Regulation 28 compliant. Please visit our funds page for the most up-to-date fund information. Fund information is correct as of 20 March 2026.

Why fees matter even more in preservation funds

As you are not able to contribute further to your preservation fund, you should aim to maximise the returns available for reinvestment. Lower fees may mean more returns can be reinvested, while higher fees may mean fewer returns are available to reinvest. Even a small difference in fees, when compounded over time, can have an impact on the potential growth of your preservation fund.

Let’s have a look at an example which highlights the effect of fees (1% vs 3%) on your preservation fund over the long-term.

Let’s assume the following factors for our example:

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

Example 1 (1% Fees): Real investment value is R398,578.

Example 2 (3% Fees): Real investment value is R231,004.

You can see in this example the effect that a small difference in fees can have on your real investment value when compounded over time. This example is for illustrative purposes, and real results may vary. Learn more about fees here.

Your Effective Annual Cost (EAC) is a standardised metric which was introduced in 2015. This metric allows you to see the total fees and costs of owning an investment product over one year of time. You can then use this information to compare with the fees and costs charged by different service providers. All factors being equal, a higher EAC would mean that less of your investment returns can be reinvested and potentially grow and compound over time, while a lower EAC may mean that more returns may be reinvested and allowed to potentially grow over the long term.

The EAC should be displayed on your investment statement or requested from your service provider. Of course, the EAC of an investment is just one factor to consider when comparing different service providers. Here are some of the fees that you can expect to see deducted from your preservation fund:

• Administration fees: There will be administration fees charged for admin tasks such as compliance and tax.
• Advisor fees: An advisor will charge fees for their advice and other services. There may be both an initial and an ongoing fee charged.
• Management fees: These fees will be charged for the management and running of the fund.

We focus on keeping our fees low-cost, transparent and simple at 10X. You can also be sure that there will be no hidden costs applied to the 10X Preservation Fund. Please explore our products for the most up-to-date fee information. Fee information is correct as of 20 March 2026.

Questions to ask before withdrawing

Before withdrawing money, you need to consider both the short and long-term consequences. Asking the right questions can help you avoid decisions that may negatively impact your financial security.

1. Are there other sources of capital available that you could instead use?
2. How much tax will you pay on this withdrawal if you withdraw now, and how will this reduce the amount you receive?
3. Is this withdrawal really necessary, or are you able to get by without it?
4. What effect will this withdrawal have on your overall retirement outcomes, especially in terms of potential long-term growth?

When it comes to any decision-making regarding your preservation fund, you want to ensure that you focus on your long-term financial goals and plan. While short-term needs may arise, preserving your retirement savings where possible can make a big difference to your future financial security.

Your preservation fund is designed for retirement

Your preservation fund is in place to preserve your hard-earned retirement savings for your retirement years. These savings will provide the capital that provides you with an income during your retirement years, so it needs to be carefully managed. The more money you have available to take advantage of compound growth, the better the overall growth of your preservation capital is likely to be.

Along with keeping capital invested, key factors to focus on are your asset allocation and fees. Both of these factors can also influence the growth potential of your preservation fund over time. If you have any questions regarding preservation funds and the importance of focusing on long-term retirement outcomes, don’t hesitate to get in touch with the experienced and helpful investment consultants at 10X, who are just a call away!