What is a Preservation Fund? A Simple Guide for South Africans

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A preservation fund can help you keep your retirement savings invested when you leave an employer, instead of withdrawing the money and potentially reducing your future retirement income. Whenever you’re changing jobs, you will need to decide what to do with your accumulated savings in your employer-sponsored pension or provident fund.

While there's often a temptation to withdraw these savings, choosing to transfer your savings to a preservation fund allows your money to stay invested and potentially grow over time. This article will cover the purpose of these funds, how it operates, how to select a fund, associated fees, the Two-Pot Retirement System, and how 10X can support your investment journey.

What is a preservation fund?

A preservation fund serves as a long-term retirement savings option, ideal for switching jobs and preserving previously accumulated funds in a company provident or pension scheme. It enables you to keep your savings invested for retirement rather than withdrawing them. Transferring your savings from a pension or provident scheme to a preservation fund is usually tax-free.

Make sure your pension fund moves to a pension preservation fund or, if applicable, your provident fund to a provident preservation fund. Additionally, all growth within your fund is not taxed. At retirement, you can transfer your fund into an annuity, which will generate an income during your retirement years.

How does a transfer work?

A transfer usually involves moving your accumulated retirement savings from an employer pension fund or provident fund into the corresponding preservation fund. This allows the money to stay invested for retirement instead of being paid out as cash.

If the money is transferred directly into the fund, it is usually not taxed at the point of transfer. This is one of the key reasons investors may choose to preserve their retirement savings rather than withdraw capital. A direct transfer can help keep the full amount invested, giving it more opportunity to potentially grow over time.

This is different from withdrawing the money as cash. If you take a cash withdrawal, tax may apply according to the relevant withdrawal tax table, and the amount left for retirement may be reduced. Before making a decision, you should review the rules of the transferring fund, complete the required documents and confirm the fund option that applies to your original pension or provident fund.

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Can you contribute to a preservation fund?

A preservation fund differs from a retirement annuity because you cannot add extra contributions after setting it up. Its main goal is to invest your savings, safeguard them, and potentially increase your wealth over time. You cannot set up bank debit orders or make lump sum payments.

To optimise growth, it's important to select a suitable fund and manage fees carefully. If you want to make ongoing contributions, a retirement annuity is a better option, as it allows regular monthly payments or lump-sum contributions, depending on your preferences.

This is why this type of fund is best understood as a holding-and-growth vehicle for retirement savings you have already accumulated through an employer fund. Once the transfer has been made, the focus shifts from adding new money to managing the money already preserved. Your fund selection, asset allocation, fees and time in the market can all play an important role in how your preserved savings may grow before retirement.

Can you withdraw from a preservation fund?

A preservation fund is used to preserve your savings. If you decide to withdraw capital, remember that you will have less capital invested, which may affect the retirement income available to you in the future. The withdrawal will also be taxed according to the withdrawal tax tables, which may then mean you are taxed more than if you wait until retirement to withdraw.

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

Cash withdrawals from age 55 will be taxed under the retirement lump-sum tax tables. Please see below the retirement lump sum tax tables, which have been taken from the SARS website:

The impact of the Two-Pot Retirement System

The Two-Pot Retirement System launched in South Africa on September 1, 2024, divides retirement savings into three parts: the savings portion, the retirement portion, and the vested portion. A preservation fund is impacted differently since it does not allow additional contributions.

Under this new system, you can withdraw from your savings pot according to the rules, but it is recommended to keep your savings invested to possibly grow over time. You can withdraw once a year, with a minimum amount of R2,000, and such withdrawals will be taxed at your marginal income rate, plus an administration fee.

The retirement component is intended to remain preserved until retirement and generally must be used to provide retirement income, subject to the applicable retirement rules, while the vested component holds pre-1 September 2024 savings and preserves the rights attached to those amounts.

Please check the latest FSCA guidance for the most up-to-date information on the Two-Pot Retirement System.

How is a preservation fund invested?

Asset allocation refers to how an investment portfolio is divided among different asset classes, such as equities, bonds, property, cash, and offshore investments. It is the mix of growth, income and defensive assets held in a portfolio. The right mix will differ from person to person and depend on factors such as your time horizon, risk tolerance, and long-term financial and retirement goals. Research by Brinson, Singer, and Beebower highlights the importance of carefully and strategically selecting your asset allocation.

The usual asset classes are: cash, bonds, real estate and equities. An investor with a longer investment horizon who is more comfortable with volatility and risk may be more willing to allocate to growth assets, such as equities. An investor who needs greater stability or who has a shorter investment timeline may prefer a portfolio with a larger allocation to bonds and cash.

Cash is less likely to experience the same levels of volatility that you might see with equities or real estate. It is the most stable of the asset classes, but it may struggle to keep pace with inflation over long periods, potentially reducing purchasing power.

Bonds can provide income, diversification, and a measure of stability within a portfolio. They are usually less volatile than equities, but they are not risk-free. Bond values can be affected by changes in interest rates, inflation expectations, and the issuer's ability to repay its debt. While they’re seen as more conservative, they still may outperform expectations.

Real estate provides exposure to real assets and economic activity, while generating income through rentals and distributions. It may contribute to long-term portfolio growth. However, listed property can be volatile and may be affected by interest rates, economic conditions, occupancy levels and changes in the property market. Often, real estate may serve as a good hedge against inflation.

Equities may provide long-term capital growth, and they have the potential to earn returns above inflation. Equities have historically delivered returns above inflation by approximately 7% annually over long periods (based on JSE All Share Index performance versus CPI from 1960-2020). There may be volatility over shorter periods, so equities may be better suited to investors with longer investment time horizons who can tolerate volatility.

These funds are subject to Regulation 28; this puts limits on the amount you are able to invest in both equities and offshore. The purpose of Regulation 28 is to encourage diversification and help ensure that your portfolio is not too concentrated. However, these limits do not remove investment risk entirely. Current rules allow you to invest up to 75% in equities and up to 45% offshore. At 10X, you have the freedom to choose from a range of funds, each geared towards different investor profiles and invested in a different mix of assets. Our funds at 10X are well-diversified across asset classes, with exposure to both local and offshore funds. Please explore our funds page to learn more about the funds on offer.

What fees should you consider?

Fees are especially crucial because no further contributions are made, and your capital is likely to stay invested long-term. It's important to review fees annually to confirm they are still cost-effective. Let’s review some of the common terms that you may come across when it comes to your fees:

• TER (Total Expense Ratio): This is a good way to compare the operating costs of similar funds.
• TIC (Total Investment Charge): An effective way to compare the full cost of the investment portfolio.
• EAC (Effective Annual Cost): An annualised estimate of the impact of product, investment management advice, administration fees, and all other applicable charges.

The EAC combines various charges linked to an investment into a single annual percentage. This percentage can be seen on your investment statement. It may include management fees, administrative costs, advisory fees, penalties, guarantees, and more, depending on the product. This standardised metric introduced by ASISA allows investors to easily compare the cost structures of different products and providers on a more consistent basis.

Assuming all factors are equal, a higher EAC may place greater pressure on net returns as fees compound over the long term, whilst a lower EAC generally means that a greater percentage of your capital remains invested to potentially earn returns and grow over time. Here is an example to help explain the effect that fees could have. We will assume the following information:

• Starting capital: R4 million
• Investment period: 20 years
• Gross annual return: 10%
• Inflation: 5%
• No withdrawals

Scenario 1 - 1% fees: The fund would grow to approximately R8.5 million after 20 years.

Scenario 2 - 3% fees: The fund would grow to approximately R5.8 million after 20 years.

As no further contributions can be made, the effect of fees on your capital is particularly important. This example is for illustrative purposes only and real results may vary. You can learn more about fees here. Our fees at 10X are clear, low-cost and transparent. Fees charged on are generally 1% or less. Please review our product-specific fee information to learn more.

How 10X can help with planning

10X focuses on disciplined, long-term investing with an index-based approach that includes active asset allocation. We focus on keeping fees low and transparent, so you can be sure of the fees you are being charged. There is a wide range of well-diversified Regulation 28 funds to choose from, allowing you to select a fund that is best aligned with your needs and goals. You can also find a free suite of online tools on our website to support you throughout your investment journey.

The EAC and preservation fund calculator are two handy tools that you may like to use when it comes to managing your fund. If you need help with any aspect of your fund, our friendly and experienced 10X investment consultants are available at no cost to you.

Final thoughts on preservation funds

A preservation fund can be a valuable way to keep your retirement savings invested and preserved for your retirement years, rather than withdrawing your savings, which can affect your retirement outcomes. Deciding to preserve your capital will require careful decision-making and management of factors such as fund selection, fees, the Two-Pot Retirement System, and more. If you are likely to be between jobs soon, now is the time to consider using a preservation fund. The 10X Preservation Fund can offer you transparent, cost-effective fees, a range of Regulation 28-compliant funds, and a disciplined long-term investment approach. Get in touch with our investment consultants to learn more.