How Life-Changing Events Impact Your Preservation Fund: Marriage, Divorce, Emigration, And Everything In Between

A preservation fund is a type of retirement savings product, designed to facilitate the continued growth of your accumulated pension or provident fund savings should you experience a change in employment prior to retirement. Preservation funds allow you to transfer your accumulated pension or provident fund savings into a tax-efficient investment vehicle rather than cashing out and stunting the growth of your retirement savings. In most cases, if you are changing employers, or face a change in your employment status, preserving your savings in a preservation fund will allow you to leverage the power of compound interest and give you a better shot at a comfortable retirement. 

With that said, there are certain rules and regulations regarding preservation funds that you should keep in mind in the event of major life changes. In terms of pivotal life changes like marriage, divorce, or emigration, understanding how these events affect your retirement savings is crucial. 

A Brief Recap Of Preservation Funds

Preservation funds allow working individuals to retain and continue to grow their retirement savings while experiencing a change in employment. A preservation fund allows you to transfer your pension or provident fund from your employer's retirement scheme into a new investment vehicle, rather than withdrawing the funds early. This approach is generally more beneficial in the long term, as it preserves and grows your retirement savings, typically making it a better option than simply cashing out.

The lump sum amount that you move to a preservation fund is tax-exempt, provided you move your savings from a pension fund to a pension preservation fund or from a provident fund to a pension/provident preservation fund. This lump sum amount is invested into various underlying funds offered by your chosen preservation fund provider, and the growth of your retirement savings continues. While your provider will likely have a good idea of the best place for your money to grow, you are also able to determine the mix of underlying assets that you prefer and choose a fund that best reflects that. 

When selecting an underlying fund, you would consider your time horizon, risk tolerance, and financial goals to determine the best option for your investment. From there, your preservation fund can increase in value through investment returns and the compounding effect of reinvesting those returns – and, since the growth of your capital is not taxed, this further enhances the power of compound growth on your fund. If you’re curious to see how your retirement savings might be enhanced over time with a preservation fund, take a look at our handy preservation fund calculator. 

While you can opt to withdraw your pension savings when you move jobs rather than preserving, this is a route that stands to significantly hamper the growth of your retirement savings. Preservation funds allow your retirement savings to benefit from compound interest and market growth over the long term, whereas cashing out often results in immediate tax liabilities, reducing the overall amount you’ve saved. You can only withdraw R27,500 of your savings prior to your retirement date without incurring tax. Any amount exceeding a withdrawal of R27,500 would mean hefty tax rates. 

SARS’ guidelines are 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 + 27% of taxable income above R726,000
• For a withdrawal exceeding R1,089,000, you will be charged R223,740 in tax + 36% of your taxable income above R1,089,000

To avoid these high taxes it's often wiser to preserve your savings during a job transition, so that you don’t lose out on the money you’ve saved. With that being said, the initial decision of whether to preserve, cash out, or opt for a mix of both, is entirely up to you. For more information on your options, take a look at our blog post on the subject.

Preservation Funds: Marriage And Divorce

Understanding how preservation funds operate within the contexts of marriage and divorce is essential for maintaining financial security. When preparing to tie the knot, you and your future spouse would consider the long-term implications of your financial decisions during marriage, particularly regarding the management of retirement funds, to avoid complications in the event of a divorce.

Preservation Funds And Marriage

Managing preserved savings within a marriage requires careful consideration and coordination, as joint financial planning can have a significant impact on your retirement savings goals. When you get married, you and your spouse will have to choose between a joint plan or individual plans for retirement. Joint financial planning can simplify the management of funds, with both you and your spouse contributing jointly to saving and investing towards retirement. On the other hand, maintaining separate accounts provides a level of security, particularly in marriages governed by community of property agreements.

In South Africa, when you get married in community of property, all assets, including retirement savings, are considered part of a joint estate. This means that a preservation fund may be subject to division in the event of a divorce. Both you and your spouse may have a claim to a portion of the retirement benefits accrued during the marriage, including those held in a preservation fund. While the fund would remain the legal property of the spouse who owns it, in the context of joint retirement planning in a marriage contract in community of property, the fund would be considered part of the shared estate.

Preservation Funds And Divorce

Divorce can significantly impact retirement savings, particularly under the South African Divorce Act. One of the key benefits of a retirement fund is that it offers protection against claims from third parties, except in cases allowed by the Pension Funds Act, the Income Tax Act, and the Maintenance Act. However, there is also an exception under the Divorce Act, which allows a member’s former spouse (also known as a non-member spouse) to claim a share of the member spouse’s retirement savings. As mentioned, this includes preservation funds, which may be divided as part of a couple’s shared assets during a divorce. Needless to say, this process is complex and often contentious, and the processing of such payouts can be slow, particularly if all legal requirements are not fully met.

The division of a preservation fund in a divorce is managed through the “clean-break” principle. This principle ensures that the non-member spouse receives their entitled share of the preservation fund immediately upon the finalisation of the divorce, rather than having to wait until the member spouse retires. The non-member spouse's share is then transferred directly into their own preservation fund, allowing it to continue growing tax-deferred until it is eventually withdrawn.

One of the advantages of this approach is that the non-member spouse does not incur immediate tax liabilities on the transfer of funds. Instead, the preservation fund retains its tax-deferred status, and taxes are only payable when the funds are eventually withdrawn, either at retirement or under specific conditions permitted by law. For the member spouse, it is important to remain in the preservation fund until the divorce order is finalised to ensure that the division of assets is handled correctly. For a detailed breakdown of divorce payments, how it works, and potential hindrances click here. 

Preservation Funds And Emigration

Should you be preparing to emigrate, you have a few options when it comes to accessing your retirement savings held in a preservation fund. As of March 2021, a ‘three-year rule’ came into effect in South Africa regarding emigration and retirement benefits. Following this, you are entitled to receive your retirement benefits as a lump sum only when meeting both of the following two conditions:

• You are no longer a South African tax resident, according to the definition of a South African tax resident outlined in the Income Tax act. According to SARS, an individual ceases to be a resident when they have been physically outside of the republic for a continuous period of at least 330 full days.
• You have maintained your status as a non-tax resident for a minimum of three consecutive years.

In short, you must have given up your status as a South African tax resident and have left the country for at least three years before you can receive your retirement benefits early. After that, you are able to move any or all of your net proceeds out of South Africa. However, prior to retirement, you are allowed one withdrawal from the fund (subject to the aforementioned withdrawal tax tables). If you have not used this one withdrawal already, you are able to do so without having to wait the three year residency test period.

Preservation Funds And Death

According to the Pension Funds Act, the money held in your preservation fund will be distributed among your financial dependents (like your family members or spouse) upon your death. They will directly receive the money held within the fund, without being subject to probate processes. Your dependents (the people who rely on you financially) can also choose how they want to receive this money:

Cash Payment: They can take a cash lump sum subject to tax, where the first R550 000 is tax free. The balance will be taxed on a sliding scale between 18% and 36%. SARS’ retirement fund lump sum tax tables can be found here.

Annuity (Regular Payments): They can use the capital to purchase a life or living annuity. No tax will be paid on the purchase of the annuity, but the beneficiary will be taxed on annuity income as per regular income tax. For many, this is a favourable option in terms of tax implications.

Mix Of Both: They can also choose to take part of the money as a cash payment and use the rest to buy an annuity.

It’s important to note that the death benefits in a retirement fund are not considered property in a deceased estate (the total value of what you own when you die). This means it goes straight to the people you’ve chosen as beneficiaries, which can help reduce the taxes on your estate.

What If You Don’t Have Dependents?

If you don’t have anyone who depends on you financially, the money will be given to the people you’ve named on a beneficiary nomination form. This form is a document where you list who should receive your preservation fund money when you pass away. If you don’t complete this form and don’t have any dependents, the money will go into your estate and be distributed according to your will. Any lump sum payment made upon your death will be taxed as a retirement benefit, as if it had been received by you prior to passing.

Preservation Funds And The Two-Pot System

While not necessarily a major life event, the introduction of the two-pot retirement system is certainly something to think about. The two-pot retirement system is a recent development in South Africa’s retirement landscape, effective from 1 September 2024. The two-pot system will be introduced as part of the government's efforts to reform retirement savings. It’s designed to balance the need for long-term retirement savings with the flexibility to access funds in case of emergencies. Under the two-pot system, your retirement savings are divided into two "pots".

Retirement Pot: This portion of your savings is preserved strictly for retirement. You cannot access these funds until you reach retirement age, ensuring that a portion of your savings is always available for your future.

Savings Pot: This is a smaller portion of your savings that you can access before retirement. It’s designed to provide flexibility in case of emergencies like unforeseen medical expenses or financial hardship. The savings pot allows you to withdraw funds, but it comes with certain restrictions to ensure that you don’t deplete your retirement savings prematurely.

When contributing to a retirement fund under the two-pot system, a specific percentage of your contributions will go into each pot. The exact split is determined by regulations, with the majority typically going into the retirement pot to ensure adequate savings for retirement. 

This system encourages individuals to strike a balance between saving for the future and managing financial emergencies. By allocating a portion of your savings to an accessible pot, it reduces the temptation to make early withdrawals from your preservation fund, which could significantly diminish your retirement savings. You can read more about the two-pot retirement system here.

What Happens To Your Current Retirement Savings?

If you already have a preservation fund, starting on 1 September 2024, your retirement savings will be split into three parts. A Vested Pot will hold your existing savings up to 31 August 2024 and remain under current rules, minus “seed capital” for your new savings pot. Your Savings Pot starts with 10% of your existing benefit (up to R30,000) for emergencies. Lastly, a Retirement Pot holds the remaining savings for long-term growth. 

Future contributions will be split: one-third to the Savings Pot and two-thirds to the Retirement Pot. At retirement, each pot offers different options, balancing flexibility with security. If you’d like further insight on how these changes will affect your retirement savings, take a look at our two-pot calculator. All you have to do is fill in a few details about your current savings and future contributions and our calculator will generate a personalised breakdown of what to expect. 

To conclude, preservation funds are useful for maintaining and growing your retirement savings, offering tax-efficient, long-term benefits. Understanding the details of preservation funds and being well-informed about your options is crucial, so if you have any further questions, don’t hesitate to reach out. At 10X Investments, you can rely on our knowledgeable consultants – there are no chatbots or call centres here, only real professionals ready to help.