Should you change preservation fund providers?

A preservation fund is an investment vehicle where you can continue to grow your retirement savings from a pension or provident fund. With a preservation fund, you can keep retirement savings invested and benefit from potential compound growth until you decide to retire. Instead of cashing out on these savings, which would stop investment growth, preservation funds allow for a smooth, tax-free transfer to a provider who invests these funds on your behalf.  

South Africans often transfer retirement funds to a preservation fund without properly assessing the preservation fund and the service provider offering it. When considering a service provider, it’s important to look at factors such as fees, past performance, online platform tools and customer service. These factors can vary quite wildly between providers.  

In this article, we will look at when and why it may make sense to change your preservation fund service provider, as well as highlight some potential red flags to look out for. We’ll also cover how to go about switching preservation fund providers.  

Quick recap: What is a preservation fund?  

A preservation fund is a retirement savings vehicle that allows you to transfer your funds across from a pension or provident fund when changing jobs. This allows you to preserve your retirement savings. Your savings can then continue to potentially grow and accumulate over the long term, eventually providing for your retirement years.  

You can transfer your savings across to a preservation fund without any tax obligation. You should, however, make sure that a provident fund is transferred across to a provident preservation fund and that a pension fund is transferred across to a pension preservation fund.  

As an investor, you can select from a range of underlying funds in which your capital will be invested. This will depend on your financial needs, risk tolerance levels and time horizons. In summary, a preservation fund is a long-term savings vehicle that plays a key role in your retirement plan, allowing for returns to potentially grow and compound over time.  

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The Two-Pot Retirement System  

The Two-Pot Retirement was introduced by the National Treasury in September 2024. This has affected the way that preservation fund withdrawals are governed. Under the new system, all contributions are split between the ‘savings’ and ‘retirement pot’: one third to the ‘savings pot’ and two thirds to the ‘retirement pot’. Withdrawals are allowed from the savings pot once per year for a minimum amount of R2000. Keep in mind that withdrawals from the savings pot should be for emergencies only. Your withdrawals are taxed at your marginal tax rate, and you will also be charged an administration fee. The retirement pot funds will remain invested until retirement age, currently set at age 55 in South Africa.  

All savings and contributions made prior to September 2024 will form the ‘vested pot’. This pot is governed by the old rules. This essentially means that you are allowed one withdrawal from your vested pot portion of your preservation fund before retirement, taxed at lump sum withdrawal rates.  

Additional contributions to a preservation fund are not permitted. However, the savings component of the preservation fund will grow 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 latest FSCA guidance on the Two-Pot Retirement System. 

Common reasons to consider changing your preservation fund provider  

There are a variety of reasons that can lead you to consider changing service providers. Let’s take a further look at some of the most common reasons that people consider switching service providers.  

High fees: Fees are often the main reason for switching providers. You may find that your service provider is charging high fees, and in some cases, there may even be hidden costs involved.  

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Underperformance: Perhaps your current service provider hasn’t managed to generate good returns or meet their benchmark over the years. 

Limited investment options: It could be the case that there are limited fund options or appropriate funds that meet your investment goals and investor profile. 

Poor transparency: Poor transparency is a major red flag. If your provider is not transparent with fees or their investment strategy, perhaps it’s time to consider a switch.  

Weak customer service: Customer service may be lacking or below par, which can be frustrating as an investor. You may find yourself regularly dealing with call centres. 

New personal strategy: You may find your goals and needs have changed over time, and a provider that was able to meet your goals is no longer suited to your requirements. 

We can see that there are plenty of reasons that can trigger a desire to switch service providers. In the next section, we’ll dive deeper into the importance of fees.  

How high fees impact investment growth  

Fees are a key factor in the potential growth of your preservation fund, especially when these fees are compounded over the long term. High fees, when compounded over time, may mean that you have lower returns and, in turn, this will impact the value of your capital. On the other hand, lower fees will mean that you have more returns available to compound and also positively impact the potential value of your capital in the long term.  

The Effective Annual Cost (EAC) is a metric which was introduced in 2015 by ASISA. This metric allows investors to evaluate and compare the total costs of owning an investment over a one-year period. This includes fees such as administration fees, advisor fees and management fees, as well as any other applicable costs. 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 means that more of your returns may be reinvested and potentially grow over the long term. Of course, the EAC of an investment is just one factor to consider when comparing service providers.  

Fee Example:

Let’s look at an example to show the effect of high fees on your preservation fund. We will be comparing fees of 3% with fees of 1%. 

Let’s assume the following factors: 

• Investment period of 30 years 
• Investment of R2,000,000 
• Return of 12% per annum 
• An inflation rate of 6% 

Example 1 (1% Fees): Real investment value is R7,970,000 

Example 2 (3% Fees): Real investment value is R4,620,000 

In the above example, a 2% difference in fees is equal to a difference of R3,350,000 in real investment value, clearly highlighting the role that fees play. Note that the above example is for illustrative purposes, and actual results may vary. You can learn more about how fees impact growth here.  

10X has a transparent, low-fee offering of 1% or less for most of our products. Our index tracking investment strategy is more cost-effective, allowing us to charge fees on the lower end of the spectrum. To find out about our latest product-specific fee information, please check our website or speak to one of our skilled and experienced investment consultants.  

Index tracking vs active management: What matters when changing providers?  

Some providers use an active investment strategy, and others opt for index tracking. Index tracking is when a benchmark index’s asset allocation is mirrored in an attempt to match the performance of the index. As there is less research, analysis, buying and selling involved with this strategy, this means that there are less costs to pass on to the investor and therefore that it can be more cost-effective.  

On the other hand, an active investment strategy usually involves the expertise of a fund manager in picking the right stocks at the right time in order to maximise growth and beat the returns of the market. This involves a lot of research and trading, which can make it less cost-effective. This may also mean higher fees being passed on to you, the investor.   

As data from the SPIVA Scorecards suggests, index tracking outperforms active management most of the time, especially over the longer term. According to the latest SPIVA South Africa Scorecard (as of 31 December 2024), 60.84% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending 31 December 2024.  

10X makes use of an index tracking investment strategy, which also involves a more active approach to asset allocation, allowing us to charge lower fees. We focus on long-term results and getting the outcomes our clients desire as they move towards retirement. To read more about our investment strategy, clickhere.   

All of the funds available within the 10X preservation fund make use of index tracking, so that we can keep costs lower for our clients. To learn more about the 10X preservation fund, follow this link.   

If the fees you are being charged are too high and you are using a provider with an active management style, you may see value in switching to a provider with a more passive investment strategy. This often results in lower fees being charged. 

Evaluating your current provider’s performance and features 

If you’re considering switching service providers, you should carefully evaluate your current provider’s performance. Consider the following factors:   

1. Performance: How has the preservation fund performed? How have the returns been over the last 5+ years? How do these returns compare to their fund’s benchmarks?  
2. Investment strategy: What investment strategy does the service provider use? Do they use an active or passive investment strategy? How does this relate to the fees you are charged? 
3. Fees: What are the total fees that you are being charged? Are they on the higher or lower end of the spectrum, and how does this link to the investment strategy being used? 
4. Asset allocation: Is the current asset allocation meeting your financial goals and risk tolerance? The asset allocation refers to the mix of underlying assets in which your preservation fund is invested. This can be a mix of equities, bonds, real estate and cash, both local and offshore.  
5. Service offering: How easy is it to access and navigate the online platform? Are you able to access statements and transact easily? Is it easy to speak to consultants and get assistance? 

If you’ve carefully considered the above and would like to switch providers, do not stress. The process is straightforward and generally easy to complete.  

The transfer process: What you need to know  

You can transfer your preservation fund between service providers, subject to Section 14 of the Pensions Funds Act, at no cost to you. If you do decide that you wish to transfer your preservation fund across to a different service provider, there is a step-by-step process to follow.  

You will need to complete transfer application forms from both your existing and new providers, as well as provide all of the necessary documentation and identification. The process can be summed up as follows:  

Research and choose a service provider: First and foremost, you need to decide on a new service provider and preservation fund. For fees of 1% or less on most products, consider 10X. 

Transfer applications: You need to fill in and submit transfer applications from both providers. You will need to provide copies of your ID and tax number, too. You may need a Section 14 transfer certificate, completed by both your existing and new fund. 

Inform your current provider: You will need to inform and submit all of the necessary documents to your current provider to initiate the transfer process. Your existing provider will send additional documentation to your new provider to be signed by the principal members.  

Transfer: Once approved, your savings are transferred to a new fund. No tax is payable at the point of transfer. 

Keep in mind that a section 14 transfer can take longer than six months to complete.  

When should your preservation fund stay put?  

After evaluating your current preservation fund and service provider, you may find that the best course of action is to stay put. This may be the case if you find, upon analysing your current preservation fund, that you’re paying low fees, you have fund options that fit with your goals and an overall product that resonates with you.  

Transferring to a different provider might not be worth the effort in cases where everything is still going smoothly. Perhaps you have recently changed providers and want to avoid making any further changes in the near future. The best course of action is to make sure that you’re well-informed so you can make educated decisions regarding the future of your retirement savings.  

Conclusion: Transferring preservation funds  

You may find that after careful evaluation of the various factors at play, transferring your preservation fund to a different service provider may improve the long-term growth of your capital. Before making such a decision, you should compare fees, the investment strategy, past service received, online access and the digital platform offering. Your decision-making should involve thorough research, and it should not be taken lightly.  

At 10X, we provide transparent and low-fee offerings focused on achieving long-term returns. To find out more about the 10X preservation fund, follow this link or speak to our helpful investment consultants with any queries that you may have.