The impact of resignation, retrenchment, or dismissal on your provident/pension and preservation funds

A preservation fund is a tax-efficient investment product that plays an important role in both the preservation and growth of your retirement investment savings. A preservation fund is funded by a lump sum amount, which usually comes from your pension or provident funds when changing employers. This can be due to resignation, retrenchment or dismissal.  When you leave an employer, you can transfer your pension or provident fund savings across to a preservation fund. A preservation fund helps “preserve” and grow the funds while compounding the returns over the long term. These funds can then potentially provide you with financial stability during your retirement years.  

A brief overview of preservation funds 

Preservation funds allow your retirement funds that have been transferred from a pension or provident fund to compound and potentially maximise their growth over time. The primary function of a preservation fund is to protect your hard-earned savings. Compared to a pension or provident fund, which is offered by an employer, preservation funds are a way to preserve and grow the capital that originates from a pension or provident fund. Contributions to the pension or provident fund can be made by both the employer and employee, or just one of the above.   

When the time comes to transfer your funds from your pension and provident fund across to your preservation fund, you first need to complete the forms from both the transferee fund and the transferor fund. You then need to choose the underlying funds where the capital is invested. These underlying funds will include a mix of different asset classes, such as equities, bonds, real estate and cash. You should choose funds according to your financial goals and needs, risk tolerance and investment horizons. Your fund choices also need to be compliant with regulation 28 of the Pensions Fund Act. The act caps the amount of equity exposure to 75% and offshore exposure to 45%.  

Once all the paperwork has been finalised, your pension or provident fund money will be transferred across to your new preservation fund. This lump sum amount is tax-exempt, so you don’t have to worry about any tax penalties being triggered. There is also no tax on the growth, so this allows even more of your potential returns to be compounded and grow over time.  

The Two-Pot Retirement System 

Due to the implementation of the Two Pot Retirement System by the National Treasury in September 2024, the rules regarding withdrawals have changed a bit. Under the new system, all contributions made to retirement products will be split one-third to the ‘savings pot’ and two-thirds to the ‘retirement pot’. The savings pot can be accessed once per year, for a minimum withdrawal amount of R2,000. These withdrawals will be taxed at your marginal tax rate. The retirement pot is to remain untouched until retirement, which is currently age 55.  

There may also be a ‘vested pot’, and this refers to all funds which were invested before September 2024. The rules which were in place before September 2024 apply to the vested pot, which allows for one withdrawal before retirement. This means that you can withdraw the entire vested pot if you resign from your employer, but this has the potential to put your retirement at risk. Many investors instead choose to transfer the funds to a preservation fund where they can grow and eventually provide for retirement.  

Preservation funds are less affected by the Two-Pot Retirement System, as they are unable to receive further contributions, compared to, for example, a retirement annuity. Retirement annuities are more affected by the Two-Pot Retirement System, as retirement annuities receive additional contributions, which are then split one-third and two-thirds between the two pots. 

Preservation funds are affected differently; the savings component of the preservation fund will instead 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. For the most up-to-date information regarding the two-pot retirement system, consult the latest FSCA guidelines. You can also make use of our two-pot calculator. 

Resignation

If you decide to resign from your current employer, you have a few options regarding your pension and provident fund money. You may decide to transfer it to a Preservation fund. This will allow your funds to be protected and preserved, whilst compounding growth over time, which will then provide for your retirement years. You are therefore continuing the process of accumulating funds for retirement, as was the case with your pension or provident fund. Some funds, depending on their rules, may allow you to remain in the fund as a ‘paid-up member’.   

Another option would be to withdraw your savings component, if you wish, although as far as retirement is concerned, it might be better to transfer it to your preservation fund, to allow for further growth of your capital. The retirement pot is to be preserved, so it will be available to provide for your retirement. If you do decide to withdraw your vested portion when resigning and prior to retirement age, it’s important to note that you will be taxed at the withdrawal rates, which are as follows:  Withdrawals are taxed according to the following tax tables, with the first R27,500 being tax-free (These have been taken from the SARS tax tables):  

• Withdrawals between R27,501 and R726,000, a tax rate of 18% of taxable income above R27,500  
• Withdrawal between R726,001 and R1,089,000, tax of R125,730 plus 27% of taxable income above R726,000 
• Withdrawal exceeding R1,089,000, charge of R223,740 in tax plus 36% of your taxable income above R1,089,000 

So not only are you losing out on retirement savings, but SARS is taking a significant portion of your funds. If you transfer your pension/provident fund capital across to a preservation fund instead, it will allow for these savings to grow over time, with the returns compounding in order to provide for your retirement years.

Retrenchment  

Retrenchment refers to a company laying off some of its employees to reduce its workforce. The company relays to its employee that he or she is being retrenched and the company no longer requires the employee’s services. Compared to resignation, where the employee decides that they wish to no longer work at a particular company, this type of employment termination comes from the employer’s side.   

If you are retrenched, you may transfer the full amount in your pension or provident fund to a preservation fund. This once again allows for your capital to continue growing and accumulating for retirement. Many people would try to avoid withdrawing funds from their pension or provident fund, but if you are forced to withdraw from your vested portion for financial reasons, the first R500,000 of your retirement lump sum is tax-free. You are allowed to include severance payout and retrenchment benefits in this tax-free amount.  

Retrenchment is treated using the same tax tables as are used for retirement withdrawals. You could either transfer your savings pot to a preservation fund, or it can be withdrawn. Your retirement pot will need to remain preserved to provide for retirement. Retrenchment may upset the financial plans and goals which you had in place, but by making use of a preservation fund, you can help keep your financial planning on track and allow for your savings to carry on growing and compounding over time.  

Dismissal 

Dismissal refers to the termination of employment from an employer’s side. It would usually occur when an employee has not conducted themselves properly or done something which is against the company’s code of conduct and therefore warrants dismissal. This situation is treated the same as resignation, and the same options would exist for the employee. 

Preservation fund fees  

It’s tremendously important to be aware of the fees which you are being charged on your preservation fund. You want to make sure that you choose a service provider who is transparent about the fees and costs that they charge. Ideally, you should aim to find a service provider who charges low fees. High fees affect your returns overall, especially as this can potentially be compounded over the long term.  

Even a seemingly small difference between fees being charged by different service providers can have a potentially profound effect on your capital amount. This is even more so the case with preservation funds, as you aren’t allowed to add in any further contributions, so you are solely relying on returns, and want to avoid having these depleted by high fees. The idea behind the preservation fund is to preserve and grow your capital, so you don’t want to unnecessarily deplete funds by needing to pay high fees. Fees that you may see charged on your preservation fund are fees such as administration fees, management fees and advisor fees. There may also be other hidden costs.  

At 10x, we simplify investments with low fees, an exceptional track record and a straightforward investment approach. We offer fee structures that typically amount to 1% or less, depending on how much you have invested and the product that you’re invested in. All fee schedules can be found on our website, or you can speak with one of the 10x investment consultants.  

Key Considerations When Choosing a Preservation Fund After Employment Changes  

When using a preservation fund for preserving your savings, there are a few things to keep in mind. These are factors such as: 

Fund Selection: Within the preservation wrapper, there will be various underlying funds that you may choose, according to your timelines, risk tolerance and financial needs. These funds usually include a mix of assets like equities, bonds, real estate and cash. For example, if you are an investor aggressively chasing growth, you should aim to maximise your equity exposure, while still adhering to regulation 28. If you prefer less volatility in your portfolio, you would typically include more bonds. 10x investments offer a wide range of funds to cater to the different needs of the investor. To find out more, follow this link.  

Fees and Costs: You should always be aware of all charges and costs involved with your preservation fund. Capital preservation and growth are of great importance, and lower fees can lead to potentially higher returns. Have a look at this cost comparison calculator to make sure you are not being overcharged by your current service provider.  

Flexibility of Withdrawals: Preservation funds are used as a vehicle to grow your savings for retirement, so flexibility of withdrawals is not a key focus. In times of emergency, you may withdraw from your ‘savings pot’ once per year for a minimum amount of R2,000. 

A retirement annuity is another tax-efficient savings vehicle. It is a bit more flexible, as it allows for regular contributions. Similar to a preservation fund, there is no tax payable when transferring to a retirement annuity. These are also tax-deductible, meaning they could potentially move you into a lower tax bracket and reduce the amount of tax that you need to pay in a particular tax year. You are also able to withdraw from the ‘savings pot’ according to the same rules that apply to preservation funds. Again, it is typically best to keep the funds invested if at all possible, to allow the capital to potentially compound and grow over time.  

Preservation funds for job changes

A preservation fund is a great way to preserve and grow your lump sum funds to provide for retirement. If you find yourself changing jobs or between jobs after a resignation, retrenchment or dismissal, transferring your pension or provident money to a preservation fund is a sensible choice. If you find yourself financially constrained, you may consider withdrawing some of the funds, but if at all possible, funds should remain invested to accumulate.  

If you would like to discuss the structure of your preservation fund and how to choose funds which best suit your needs, don’t hesitate to contact the skilled and knowledgeable investment consultants at 10x.