Why simplicity matters for your preservation fund

It is common for investors to think that, for their preservation fund to perform, they need to include a range of complex techniques and strategies. However, complexity can lead to confusion, higher costs and difficult decision-making. Focusing on a simpler strategy may indeed lead to better long-term outcomes, especially in a vehicle such as a preservation fund, which is designed for long-term saving.

In this article, we will take a closer look at the ins and outs of opting for a simple long-term strategy that focuses on careful asset allocation, low fees and an index-tracking investment approach to pursue the best outcomes for your preservation fund.

What is a preservation fund?

A preservation fund is a long-term retirement savings vehicle that allows employees to continue saving for retirement when changing jobs, instead of withdrawing capital. These savings will be transferred from your employer-sponsored pension or provident fund to a new preservation fund. This will happen without triggering any tax implications. Growth within the preservation fund will also be tax-free.

This is beneficial because it means more of your money will remain invested to potentially grow and compound over time, eventually providing for your retirement years through an annuity. You will need to ensure that your savings are either transferred from a pension fund to a pension preservation fund or a provident fund to a provident preservation fund.

A preservation fund does not allow for any further contributions, so in order to target growth in your portfolio, you would want to focus on a simple and clear strategy that looks at factors such as your asset allocation, fees and investment strategy.

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Understanding the Two-Pot retirement system

Preservation funds, as well as other retirement products, are now governed by the Two-Pot Retirement System, which was implemented by the National Treasury in September 2024. The Two-Pot Retirement System is structured such that contributions are split, with one-third allocated to the savings pot and two-thirds allocated to the retirement pot. In addition to these two pots, you may also have a ‘vested’ component. This vested pot is for all savings that were invested prior to the Two-Pot System coming into effect in September 2024, and remains governed by the old rules.

Keep in mind that preservation funds do not allow for new contributions. This means that the contribution split between the savings and retirement pot does not apply in the same way as it does for products like retirement annuities or pension funds. 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.

The new system also allows for the savings pot to be more accessible in case of emergencies, while the retirement pot is for your long-term retirement savings. You can withdraw once a year from your savings pot. The minimum withdrawal amount is R2,000. It’s important to note that you will be taxed at your marginal tax rate, and an administration fee will also be included.

Please consult the latest FSCA guidance on the Two-Pot Retirement System.

The hidden cost of complexity

Complexity in investing can be appealing, as it may appear to offer a more advanced way to achieve better investment results. However, this is not necessarily the case. More complicated strategies do not always translate into better long-term outcomes. It may instead create confusion and unnecessary risk for investors. This can lead to behaviour like reacting to short-term market noise, switching funds too frequently, or chasing high-performing investments after strong returns have already occurred.

More complex approaches also require ongoing decision-making and monitoring, which could lead to mistakes and emotional decision-making. This may move investors away from their original long-term strategy. There may also be higher fees connected to more complex strategies. When it comes to your investing, you would want to ensure that you focus on your long-term plan and financial goals while keeping things simple; complexity may mean you lose sight of the end goal.

When it comes to preservation funds, it’s important to stay focused on your long-term retirement plan and financial goals. A simpler investment approach that prioritises diversification, disciplined asset allocation and low fees may often be easier to maintain consistently over time and help investors avoid losing sight of the bigger picture.

The role of asset allocation in a simple strategy

Your asset allocation refers to the mix of different asset classes that your preservation fund savings are invested in. These asset classes are, namely: equities, real estate (property), bonds and cash. 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. At 10X, you’ll have the freedom to 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 the most volatile of the asset classes, but they are also likely to generate the best returns in the long term. 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 doesn’t guarantee future results. Real estate is likely to generate some good returns while acting as a hedge against inflation. Bonds will likely add stability to your portfolio, but they are also likely to generate some lower returns. This doesn’t mean bonds will never outperform expectations, merely that it is typically seen as a more conservative option. Cash is the most stable of the asset classes, but you can also expect cash to generate the lowest returns of all the asset classes.

You may also consider diversifying your portfolio offshore. This can be a good hedge against local market instability and any subsequent depreciation of the Rand. Diversifying your portfolio across asset classes can help to balance risk and reward. Preservation funds are subject to Regulation 28 of The Pension Funds Act. This regulation caps the percentage of equities and offshore investments that you may invest in. Current regulations state that you may invest a maximum of 75% in equities and 45% offshore.

When it comes to selecting your asset allocation, you would want to consider your risk profile, your investment timelines and your long-term financial goals and plan. Your asset allocation should be well-aligned with these three factors. Your risk profile refers to your appetite for risk and how risk-averse you are. Your investment timelines refer to how long you envisage keeping your savings invested.

At 10X, we offer you a well-diversified range of different funds that will appeal to all investors. Please visit our funds page for the most up-to-date fund information.

Why index-tracking investing supports simplicity

Index-tracking is an approach to investing that focuses on discipline, simplicity and consistency. It is when a benchmark index, such as the S&P 500, is matched in order to try to get the same results as this benchmark. This approach may mean that there will be a lesser number of activities involved and therefore lower overall costs and fees for you, as the investor.

An actively-managed approach will involve a fund manager who is actively looking for the best stocks. This approach will involve research, analysis and buying and selling costs. It may mean overall higher costs, which may be passed on to you as the investor. This approach doesn’t always work as intended, as data from the SPIVA scorecard suggests.

The S&P Indices Versus Active (SPIVA) Scorecards track the performance of actively managed funds against their benchmarks globally. According to the latest SPIVA South Africa Scorecard (as of June 2025), 67.61% of South African actively managed equity funds underperformed the S&P South Africa DSW Capped Index over the ten-year period ending June 30, 2025. H2: Why low fees matter in your preservation fund The importance of fees should never be understated when it comes to managing your preservation fund. Fees may reduce the returns that you have available to reinvest. A small difference in fees may not seem like a lot, but when this is compounded over time, it can have a major impact on the long term. There are some usual fees that you may see deducted. These are:

• Administration fees: There are administration fees such as reporting, tax, compliance and similar that will incur fees.
• Advisor fees: If you are making use of an advisor for advice and other services, they may charge both an ongoing and an annual fee for these.
• Management fees: The fees that you may see charged for the running of the fund.

Let’s look at an example to illustrate the impact of fees on your funds when compounded over a 30-year period. We will assume the following information for our example:

• Investment period of 30 years
• Investment of R150,000
• Return of 12% per annum
• An inflation rate of 6%
• Example 1 (1% Fees): Real investment value is approximately R598,000
• Example 2 (3% Fees): Real investment value is approximately R347,000.

A difference in fees of just 2% can have a potentially huge impact on the final investment value of your preservation fund. This example is for illustrative purposes only, and actual results may vary. You can learn more about the impact of fees here.

Effective Annual Cost (EAC) is a standardised metric that was introduced by ASISA in 2015. This useful metric allows you to see all the fees and costs associated with owning an investment product over a one-year period. All factors being equal, a higher EAC may mean that there are fewer returns available to be reinvested and potentially grow over time. A lower EAC may mean that there are more returns to be reinvested and allowed to potentially compound.

Please feel free to make use of our 10X EAC calculator, which is a part of the free online suite of tools we provide on our website. This can be particularly useful to compare and evaluate the EAC charged by different service providers.

The behavioural advantage of simplicity

One of the biggest benefits of keeping your investment strategy simple is the positive impact it can have on investor behaviour. Successful long-term investing is often less about trying to outperform the market and more about staying disciplined and consistent over time. Let’s have a look at some of these advantages:

• It encourages discipline and consistency: A simpler investment strategy can be easier to understand and maintain, which leaves less room for confusion or uncertainty.
• It reduces the risk of emotional decision-making: During periods of market volatility, investors may feel tempted to react emotionally by switching funds or changing strategies. A simple, long-term approach reduces the risk of knee-jerk decisions.
• It keeps the focus on long-term goals: As you’re avoiding unnecessary complexity, you may find it easier to stay focused on retirement objectives instead of being distracted by financial headlines and short-term market movements.
• It can help you to avoid performance chasing and chasing high returns: Investors sometimes move into investments that have recently performed well, hoping these returns will continue. This can result in poor timing and inconsistent decision-making. A disciplined and simple approach helps you avoid chasing high returns and switching strategies unnecessarily.

How to simplify your preservation fund strategy

There are a few practical steps that you may wish to put in place in order to simplify your strategy:

• Make sure that you are clear on your long-term financial plans and goals.
• Ensure that your selected asset allocation is well-aligned with your investor profile and long-term plan and financial goals.
• Review fees and ensure that they are not too high, and make sure that you have a full understanding of what you’re paying for.
• Do not react to short-term market noise and instead focus on the long term.
• Review your preservation fund annually to ensure it is still aligned with your goals.
• Consider a service provider using an index-tracking investment strategy that may also be more cost-effective.

How 10X supports a simple investment strategy

At 10X, we like to focus on a simple preservation fund strategy that focuses on long-term growth. Our approach focuses on simplicity, transparency, diversification and cost-efficiency. Here are some of the ways that we support a simple, effective preservation fund strategy:

• Low-cost transparent fees: We offer low-cost, transparent and simple fees for investors.
• Index-tracking investment approach: We make use of an index-tracking investment strategy that includes a more active approach to asset allocation.
• Well-diversified fund options: Our funds on offer include a range of well-diversified options, giving investors access to a range of asset classes, including local and offshore assets.
• A focus on simplicity and clarity: We like to keep all aspects of the investing process clear and transparent for all investors.
• Long-term investing focus: Our overall focus is on superior, long-term results for our investors through disciplined investing, careful asset allocation, and low fees.

Final thoughts: Simple often works better with a preservation fund

When it comes to investing, overcomplicating is often not the best approach. Instead, taking a simpler, clearer approach to your preservation fund may lead to better long-term outcomes. A focused, disciplined approach to your asset allocation, fees and investment strategy may yield the best results in the long run. The 10X investment consultants are experienced and knowledgeable when it comes to all aspects of preservation funds. Feel free to get in touch today to learn more about our investment products or to open a 10X Preservation Fund today!