The role of asset allocation in preservation fund performance

A preservation fund can play a major role in your retirement planning. If you are able to plan for long-term savings throughout your working career, you stand a better chance of the retirement savings that you’ve accumulated providing for you during your retirement years. Retirement funds can be saved over time using a variety of investment vehicles in South Africa, with one such vehicle being a preservation fund. This investment product is primarily used when you are changing jobs in order to preserve pension or provident savings.  

A preservation fund allows for your transferred retirement savings from a pension or provident fund to continue to potentially grow and compound over time. That money is then strategically invested in underlying funds aimed at meeting your financial needs and goals. Keeping your funds invested in a preservation fund, instead of withdrawing them, allows you to potentially benefit from compound growth over the long term.  

In this article, we discuss the key role that asset allocation plays in preservation fund performance, as well as the importance of understanding fees and the risk of inflation. At 10x, we believe in low fees, superior returns and a straightforward approach. Protect and grow your pension/provident fund with the 10x Preservation Fund.   

What is a preservation fund? 

A preservation fund allows you to invest the funds which have been accumulating in your pension or provident fund when you change employment. These funds can then potentially continue to compound over time and eventually provide for your retirement years. A major benefit of a preservation fund is that it allows you to transfer the funds without paying any tax. You will also enjoy tax-free growth within the preservation fund, which means more of your returns can be reinvested.  

The rules regarding retirement product withdrawals were changed in September 2024 with the implementation of the Two Pot Retirement System. This system now splits contributions between the ‘savings’ and ‘retirement’ pot. There is also a third pot, which is the ‘vested’ pot. This pot is for all contributions made prior to September 2024, and the old rules apply, meaning that you are allowed one withdrawal prior to retirement from your vested pot. You aren’t allowed to access your retirement pot until retirement, the money in which is then used for purchasing an annuity. In South Africa, the retirement age is currently set at age 55.  

The savings pot allows for one withdrawal per year, for a minimum amount of R2000. Withdrawals are taxed at your marginal tax rate and are also subject to an administration fee. In general, it is best to keep your money invested and only withdraw if it is an emergency, as it can then potentially grow and compound even further. Please consult the FSCA guidance document for the most up-to-date information on the Two Pot Retirement System.  

Regulation 28 of the Pension Funds Act puts a cap on the percentage of your retirement products that you can invest in equities as well as offshore. This is to help ensure that investors diversify their retirement products appropriately. Currently, you can invest 45% of your retirement money offshore and 75% of your retirement funds in equities.  

Why asset allocation matters in a preservation fund 

The asset allocation of an investment refers to the mix of assets in the fund in which the capital is invested. This is usually a mix of equities, bonds, real estate and cash. Each of the different asset classes has different characteristics. As an investor, you select a fund with a different mix of assets. Therefore, the fund that you select will depend on factors such as your risk profile, the time horizons you are looking at and the market conditions. If you are more risk-tolerant, you may prefer to include a higher percentage of equities in your portfolio. If you are more risk-averse, you may wish to include more bonds in your portfolio for more stability. Equities have historically provided the best returns over the long term, but this is not guaranteed. 

To potentially maximise returns, it may be a good idea to consider a fund with a higher percentage of the portfolio in equities, as these returns have a greater chance of outpacing inflation and compounding for you in the long term. You can also choose a fund with an offshore component, which helps to further diversify your preservation fund. This can potentially help to protect your investment from local market instability and currency fluctuations, while also potentially gaining from any international market exposure and associated gains. At 10X, we believe that asset allocation is an important determinant in the potential returns that your investment will produce over the long term.  

Matching asset allocation to your time horizon and risk profile 

It’s important as an investor to be sure of your financial goals, financial needs, and time horizons. When deciding on the right fund to suit your needs, you should assess your time horizons and risk profile. Generally speaking, the younger you are, the longer your investment time horizon, and so you can consider having a greater exposure to equities. This is because you have more time to recover from any market instability and associated losses. If you are older, you may wish to include a higher percentage of bonds and cash in your portfolio to potentially protect your capital from equity market volatility.  

You can consider adjusting your investment strategy to your life stage. For example, you may have a higher tolerance for risk when you are younger, say in your 20s and 30s. This means that you may like to include more growth-oriented assets in order to pursue potentially higher returns over the long term. In your 40s and 50s, you may wish to switch to a more balanced portfolio, which includes both equities and bonds to look for good returns while preserving capital and lowering risk. As you move into your 50s and 60s, you may consider including a higher percentage of bonds and cash to aim for a more cautious, stable portfolio, potentially protecting your capital.  

10X offers a wide range of carefully engineered funds, each with a different mix of assets, allowing you the freedom to diversify across the different asset classes. If you would like to find out more about the funds on offer at 10X, speak to one of the experienced and knowledgeable investment consultants or visit the 10x website.  

The impact of fees on preservation fund performance 

The importance of understanding fees should always be emphasised. There may be a variety of different fees you see charged on your preservation fund, and it’s important to be aware of the exact fees that you are being charged. Examples of the kinds of fees to expect are the administration fees, which are the fees levied for all of the administration related tasks and associated costs such as reporting and tax, the management fees, which are all the costs related to the management of the fund, and advice fees, which are fees charged by a financial advisor. 

The Effective Annual Cost (EAC) was introduced in 2015 by ASISA. This is a metric which allows you to compare the different charges across providers. It includes all of the total expenses over one year that you may expect to see charged on your investment. This means all the fees and any additional charges, such as performance fees.  

All things being equal, a lower EAC is preferable, as this then allows for more of your returns to be reinvested and potentially grow over time. If you have a higher EAC, this means that more of your returns are going towards paying fees, and this may then result in potentially lower net returns over time. Choosing a provider who has transparent and low fees could potentially result in a greater investment value in the long term. Of course, EAC is just one factor to consider when comparing investments.    

You can use an EAC calculator to compare the costs that you’re being charged by different providers, allowing you to then evaluate the service providers on offer and make an educated choice regarding who to go with. Remember, high fees can reduce your returns, especially when compounded over the long term. Low fees, on the other hand, allow for more of your returns to be reinvested and for potentially more capital growth in the long term.  

Practical Example: 

Let’s look at an example to show the effect of high fees on our living annuity. We will be comparing fees of 3% with fees of 1%. Let’s assume the following factors: 

● 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. 

We can clearly see that just a 2% difference in fees can lead to a lower return overall. Note that the above example is for illustrative purposes only, and actual results may vary. You can learn more about how fees affect returns here.  

At 10X, we charge low fees of 1% or less for most investment products, depending on the product chosen and how much you have invested. To find out more about our fee structure, please visit our website or speak to one of our experienced investment consultants.  

Inflation and the importance of real returns 

Inflation has the effect of reducing the purchasing power of your savings. This is especially evident over the long term when you can see that you are able to purchase fewer goods and services with a certain value of money. At 10X, we aim to outperform inflation over the long term to ensure that you are not reducing the real value of your capital – and that it in fact grows.   

One way to potentially outperform inflation is to consider a greater exposure to equities, and potentially greater offshore exposure in your portfolio. Equities have historically produced better returns over the long term, therefore increasing your chances of beating inflation. By including some offshore exposure in your portfolio, you can potentially protect yourself against local market instability and currency depreciation.

How to optimise your preservation fund strategy  

There are ways in which you can optimise your preservation fund strategy. Consider the following:  

1. Choosing fund or funds geared to meet your goals, while also taking into consideration your risk profile and time horizons. 
2. Ensuring that you regularly review your preservation fund to make sure that performance still meets your goals and financial needs. This is especially important after any major life events or changes. 
3. Regularly reviewing fees and costs and opting for a provider offering a transparent and low fee structure, allowing you to get the most out of your returns. 

Note that there are no guarantees in investments, and investment performance may fluctuate. 

Preservation funds: an important retirement investment 

As we can see, asset allocation is an important driver in the potential success of your preservation fund. By choosing an appropriate fund which is in line with your risk profile and timelines on hand, you can potentially maximise the long-term performance of your preservation fund. Ideally, you want your asset allocation to outperform inflation by a healthy margin, allowing you to protect and potentially grow the value of your capital over time.   

It’s also important to regularly review your asset allocation to ensure that it still matches your changing financial situation through different life stages. Not neglecting fees and the importance that low fees have on the potential growth of the capital invested in your preservation fund is also of utmost importance. By focusing on all of these factors, you are working towards a comfortable retirement.  

10x Investments simplifies your investments through low fees, a strong track record and a straightforward investment approach. The smart move is to preserve your savings, and with 10x, that can pay off even more. To learn more, speak to one of our investment consultants for free today!