The savvy investor’s guide to Preservation Funds

Holding on to your pension or provident fund savings in a preservation fund is an integral piece of the ideal retirement savings plan for the working South African. If you are changing employers, or if you have been made redundant, preserving your savings will mean a better shot at the retirement you deserve.

While you currently have the option to withdraw some or all of your pension savings when you move jobs, this stands to negatively impact the investment you can make into a living annuity or life (guaranteed) annuity upon retirement; additionally, only R27,500 of your savings can be withdrawn before your retirement date tax-free, with any amount exceeding that taxed at higher rates depending on the amount. SARS guidance is as follows:

• For a withdrawal of between R27,501 and R726,000, you will incur a tax rate of 18% of taxable income above R27,500 
• For a withdrawal of between R726,001 and R1,089,000, you will be taxed R125,730 plus 27% of taxable income above R726,000
• For a withdrawal exceeding R1,089,000, you will be charged R223,740 in tax plus 36% of your taxable income above R1,089,000

With these tax implications in mind, opting instead to preserve your savings during a job transition ensures you don’t lose out on the money you’ve saved, and bolsters your retirement fund – a decision that future you will be thankful for!

10X Investment’s diverse portfolios, strategic asset allocation, and low fees have made us the leading provider of retirement investment products, and the best choice to maximise your preserved savings. In this brief read, you’ll learn how preservation funds form part of a robust and effective savings plan for your retirement, and how partnering with 10X will give you peace of mind for the long term.

The Fundamentals Of Preservation Funds

A preservation fund is a retirement savings vehicle that is used to preserve pension or provident fund savings when an individual changes jobs or is made redundant. The key benefit of these funds is the ability to retain the tax benefits and potential for growth of your existing retirement savings.

10X Investment’s preservation funds work by allowing an individual to move the retirement savings they have accumulated from their pension or provident funds into a preservation fund with a diverse portfolio of potential investment options underlying it. You are able to invest your savings into our diverse range of assets suited to your goals and risk tolerance – from there, 10X’s historically superior returns will help grow your savings over time, and to stand you in strong stead for retirement. 

Key features of preservation funds include their tax efficiency, portability, and investment flexibility. 

• The lump sum you move to your fund is tax exempt, as long as you move your savings from a pension fund to pension preservation fund, or from a provident fund to a pension/provident preservation fund – the distinction between these is expanded upon in the next section. Additionally, you do not pay taxes on the investment returns generated by your fund, and when you do access your funds upon retirement, you will be taxed at favourable rates. 
• Following SARS, those rates are as follows: For withdrawals up to R550,000 you pay no tax. For withdrawals between R550,001 and R770,000, tax is 18% of your taxable income above R550,000. For withdrawals between R770,001 and R1,155,000, tax is R39,600 plus 27% of your taxable income above R770,000. For withdrawals exceeding R1,155,000 you will pay R143,550 + 36% of taxable income above R1,155,000 in tax. Given that preservation funds are designed to encourage working South Africans to preserve their retirement savings when changing jobs rather than cashing out early, these tax-related benefits fall away should you decide to withdraw your money. 
• Preservation funds are also portable, allowing you to move and maintain your retirement savings when you change jobs, but also between providers should you not be happy where you are. This ensures the continuous growth of your retirement savings, as well as the forward movement of your retirement savings plan.
• With 10X, your fund investment options are diverse and designed to maximise long-term growth. Choose from 10X’s selection of fund options to suit your investment goals and risk tolerance.

Types Of Preservation Funds

As mentioned above, the tax exemption of your fund contribution stands as long as you move your savings from a pension fund to a pension preservation fund, or from a provident fund to a pension or provident preservation fund. But what is the difference between the two?

Pension preservation funds are used to preserve savings accumulated through pension funds, which are usually paid to you as a pension income stream during retirement. Provident preservation funds are used to preserve savings accumulated through provident funds, which differ from pensions in that, prior to 1 March 2021, provident funds allowed you to take out a lump sum at retirement without paying an annuity. Following retirement reforms that were introduced as of 1 March 2021, provident funds operate more similarly to pension funds with members being required to take a third of the fund as a lump sum and purchase a pension with the remaining two thirds. Pension and provident preservation funds are both vehicles for saving retirement funds.

How Preservation Funds Fit Into Broader Retirement Planning

Many individuals in the working stage of their lives will have retirement savings initiated on their behalf by their employer. When changing jobs, in order to retain these retirement savings, individuals can transfer those funds into a preservation fund where the investment continues to grow. With a 10X fund, your savings are strategically invested and managed so as to maximise the returns and minimise fees, which sets you on the path to a comfortable retirement in the long term. For more information on 10X preservation fund offerings, click here.

Benefits Of Using A Preservation Fund

There are many considerable benefits when it comes to preserving your retirement savings:

1. Preservation funds come with tax benefits that boost the growth of your retirement savings over time. The growth of investments within the fund are tax-free. This allows your savings to compound, and maximises the growth potential of your retirement savings.

2. Compound growth is hugely beneficial to building substantial retirement savings. Since investment returns compound over time, even fairly modest savings can grow to sizable amounts after a few decades. For example, investing R100,000 in the 10X Your Future Fund, which has an annual growth rate of 12.2%, compounded annually, would result in a total amount of approximately R141,263.76 after three years. This growth is due to the compound interest applied each year, increasing the investment value significantly; the initial investment benefits from both the interest earned each year and the reinvestment of that interest. By opting to preserve your savings, you continue to benefit from compound growth.

3. Preservation funds provide flexible investment options, as you are able to tailor your investment strategy to fit your goals, timeline, and risk tolerance until retirement. At 10X, you are also able to change your investment strategy without penalty fees up to four times a year. 

4. The retirement you deserve is more likely to be achieved by preserving your savings than cashing out. Not only will you likely face a tax penalty (and other penalty fees, depending on your provider) for withdrawing early should you choose to do so, you are also putting yourself under pressure to catch up in your savings further along in your working life.

Preserving your savings is a smart choice for your future. By choosing to invest your savings with a 10X Preservation Fund, you’re taking advantage of our unique benefits: consistently low fees, with no upfront fees, advice fees, exit fees, hidden costs or penalties for changing your investment strategy, and a market-leading asset allocation investment strategy, offering highly-diversified portfolios that consistently outperform the market benchmarks and aim to mitigate investment risks. 

For more insights on the basics of preservation funds and planning your retirement, check out our blog and the resource hub on our website.

Navigating The Regulatory Landscape

Preservation funds in South Africa are subject to certain rules and regulations which exist to safeguard retirees’ savings, and to encourage responsible fund management. Specified withdrawal limits and restrictions apply to the frequency of withdrawals; you are typically only allowed to access your preserved funds upon retirement, or change of employment (subject to tax). In order to make the most of the tax benefits that come with a preservation fund it is advised that you only draw on your savings upon retirement, as you are taxed at favourable rates of 0% tax for a withdrawal of up to R550,000 at retirement. As explained, your tax implications are larger should you decide to cash in early, with only the first R27,500 being tax-free. 

In terms of contributions, your fund can only receive contributions by way of proceeds from a retirement (i.e. pension or provident) fund, or from another preservation fund. 10X’s funds have a R50 000 transfer minimum contribution, and while you are able to invest the proceeds you have saved from different pension or provident lump sums into either one or a number of separate preservation funds, you are not able to split the proceeds from one pension or provident sum across multiple preservation funds. 

Contributions also cannot be made to your preserved funds once they have been invested – the growth of your preserved funds occurs solely from the net investment return of the fund. SARS also allows for tax-free transfer of your money between preservation funds and other approved retirement funds; information about the regulations that apply to these transfers can be found on the SARS website.  

Legislation that may impact how you are able to access your preservation fund is the soon to be enacted two-pot system. In short, the two-pot retirement system allows you to access funds held in a savings component (or ‘pot’) in the event of an emergency, such as a family emergency, medical emergency, urgent home repairs, etc. This new system will apply to all forms of retirement fund excluding legacy retirement annuity policies and funds with no active participating members. 

As of 1 September 2024, two new components or pots will be established: a savings pot and a retirement pot. Legislation allows you to withdraw from your savings pot once per tax year, with each withdrawal being subject to an administration fee. For more information on the two-pot system, check out our blog post on the subject.

Investment Strategies For Preservation Funds

The preservation fund you choose and the investment strategy that underlies it should align with your financial goals, life stage, and investment risk tolerance. Particularly important is understanding how different risk profiles should influence your investment choices at different times. The risk profile of your investments should reflect where you are in your life and your savings journey. As you get older, you will typically look for lower risk options because you don’t have as much time or earning potential to recover from possible market downturns.

Our funds offer a mix of asset options, including equities, bonds, property, and cash investments, weighted to reflect different risk profiles. For example, equity investments carry the potential for higher returns, but come with greater volatility. If you still have a while in the working world, you might want your preservation fund to give a greater weighting towards equities. If you don’t, bonds, which typically yield less than equities but with less associated risk, might be a better option.

Diversification within your selected asset classes is key to effectively mitigating risk in your preservation fund. Diversifying your investments reduces the impact of market fluctuations on your portfolio – to this end, we’ve built a highly diversified investment portfolio that brings consistently superior returns, ensuring that your preserved savings grow as efficiently as possible. 

When it comes to selecting your investment strategy, you have the option of choosing between passive and active management strategies:

Passive management approaches, such as index funds and exchange-traded funds (or ‘ETFs’), are designed to follow the performance of a market index by holding a diversified selection of securities. They provide diversification and generally offer more predictable outcomes with a lower risk of underperformance relative to the market. These are typically best suited for more cost-conscious investors, as they carry lower fees, and for those seeking wide market exposure. 

Active management strategies involve selecting and managing investments, and often, individual stocks, with the aim of outperforming the market. While this management approach offers the potential for higher returns, active managers typically charge higher fees, and market outperformance is not guaranteed. 

No matter the investment strategy you choose, understanding your time horizon and how that affects the investments you make is key. Younger investors can generally afford a higher risk tolerance as they have time to recover from any market downturns before retirement, and have the opportunity to invest in growth-orientated assets with their preservation fund. Investors approaching retirement age may seek to preserve their capital through more conservative investments. For this reason, it’s advised to adjust your investment strategy regularly to ensure you are able to adapt to changing market conditions, personal circumstances, and your movement towards retirement as time passes.

Investment Strategy And Compound Growth

The potential of compound growth should not be underestimated! Allowing the interest earned on your preserved savings to compound over time puts you in much better standing for retirement.

By reinvesting your investment returns over time, you’re able to generate additional returns, which can be reinvested again, and so on – as time passes, this accelerates the growth of your preserved savings as the capital amount from which interest is taken expands and the accumulated returns increase. Keeping your retirement savings in a 10X Preservation Fund will ensure your investments are leveraging compound growth effectively, thereby maximising your returns and steadily growing your wealth. 

10X offers a range of diverse investment portfolios to suit any investor, regardless of financial goals, risk tolerance, or time horizon to retirement. Our flagship funds include:

1. The 10X Your Future Fund is a cost-effective, multi-asset high equity fund. At the core of the 10X Your Future Fund is maximised long-term capital growth. This fund is best suited for investors with a time horizon of 5 years or more. 

2. The 10X Income Fund shares the 10X Your Future Fund’s cost-efficiency and multi-asset selection, but is designed to deliver high income and long-term capital stability for investors with a time horizon of 3 years or more.

Click here to explore more of our funds, and to learn how each might contribute to your long-term retirement savings plan, or read about our consistently market-beating returns and asset allocation investment strategy in our comprehensive investment report.

Important Investment Considerations

To get the most out of your preservation fund and maximise the growth of your savings, remember the following:

1. Don’t ignore the impact of inflation. Inflation reduces the real value of your investment returns and diminishes the future purchasing power of your retirement savings. Without making considerations for the effects of inflation, you may find that your retirement income is insufficient to cover your living expenses. 10X aims to mitigate the impact of inflation, with investment strategies that constantly adapt to changing economic conditions and prioritise outpacing inflation.

2. Fees and administrative costs can lead to lower returns. Did you know a 1% saving in fees can mean 30% more money in retirement? You should clearly understand your Effective Annual Cost so that you know how your investment is being impacted by the fees you pay. At 10X our fees are low, and we’re transparent about them. We don’t charge upfront fees, advice fees or exit fees, and we won’t penalise you for changing your investment strategy or taking a break from your monthly contributions. Additionally, our progressive fee structure means that the more you invest, the less you pay, and in turn, the more you save.

3. Failing to revise your investment strategy periodically, as mentioned earlier in this guide, may negatively impact your retirement income plan. Make sure to review your investment portfolio to account for any changes to your situation or the macroeconomic environment. 

Ultimately, opting to preserve is a decision that will put you on a good footing as you progress through your working life towards retirement. By preserving your savings, you benefit from tax-efficiency and the compound growth potential of these funds. Preserving also provides you with a secure foundation for retirement planning (for a projection of the growth of your savings, check out the 10X Preservation Fund Calculator). 

With the transparency, flexibility, and superior performance that our clients enjoy, 10X Investments is an optimal choice for your preservation fund. For more information, see our Preservation Fund page, or get in touch today for a consultation with one of our 10X retirement experts.