Preservation funds and further retirement savings considerations

Preservation Funds are a way to preserve funds that you have accumulated in a pension or provident fund when changing jobs or after retrenchment. It is a savvy way of keeping funds invested and allowing retirement savings to grow over time via compounding returns, setting you on the right track for retirement. Furthermore, the funds that accumulate in your preservation fund are tax-free, adding to the incentive to leave your savings in a high- performance fund and not to withdraw anything from them.  

Retirement annuities are another popular long-term savings vehicle for investors to make use of prior to retirement, and they also offer attractive tax benefits, which make them doubly appealing. It’s common for full-time employees in larger companies to have either a pension or provident fund, which is set up by their employer. This fund may receive contributions from both employer and employee each month. It can be more challenging for self-employed individuals to manage their finances for a number of reasons. One of these is that they may not get a set salary every month. Another reason could be that the responsibility for setting up the savings investment falls on the shoulders of the self-employed individual, and this can take time, energy and knowledge to implement. This makes a simple, low cost and high-performing retirement annuity a very attractive prospect. 

In this article, we discuss the ins and outs of preservation funds and retirement annuities, the importance of low fees to combat inflation and market volatility, the difference between fund performance and net return, and the need for financial literacy.  

Understanding preservation funds 

Preservation Funds are retirement savings vehicles which allow you to invest funds that were previously with a pension or provident fund. This allows you to keep the retirement savings intact, letting them grow over time while taking advantage of compounding interest and setting you up for retirement. Another positive of preservation funds is that the growth within the preservation fund is tax-free, meaning your savings can compound without any tax deductions. To open a preservation fund, you will need to have funds available from a pension or provident fund, which you can transfer when changing roles or jobs.  

You aren’t able to open a preservation fund without having funds coming from an employer-based pension or provident fund. If you have opened a preservation fund and your current service provider is not meeting your needs, you can transfer to another service provider once per year. Preservation Funds are included in the new Two-Pot Retirement System, which was implemented by The National Treasury in September 2024.  

The structure of the Two-Pot Retirement System is such that contributions are split one-third to the savings pot and two-thirds to the retirement pot. The savings pot is 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 as long as you adhere to the legislated conditions.  

In addition to these two pots, you may also have a ‘vested’ component - or “pot” - which refers to all funds that were invested prior to the Two Pot System coming into effect in September 2024. The vested pot is, however, subject to the same rules that were in place prior to the Two-Pot System implementation. Previously, you would have only been entitled to one withdrawal from your preservation fund before retirement, so this rule still applies to any funds within the vested pot of a preservation fund going forward. 

Preservation funds aren’t able to receive further contributions, but the savings pot will grow at the same rate as the total investment. For example, if your total investment doubles, both the savings pot and the vested amount will also double.  

The 10X preservation fund offers many benefits, such as a wide range of portfolios to choose from depending on your needs, no upfront or ongoing fees and no other hidden costs. Check out our Preservation Fund FAQ section to learn more about preservation funds.  

Understanding retirement annuities 

Retirement annuities are another type of long-term investment that allows individuals to save towards their retirement. They are especially useful for self-employed people or employees of medium and smaller-sized companies, who might not have a pension or provident fund set up by their employers. Contributions to retirement annuities are tax-deductible up to 27.5% of your taxable income, currently capped at a maximum of R350,000. The growth of the funds invested in your retirement annuity are tax-free.  

Since 1 September 2024, which saw the implementation of the Two-Pot Retirement System, investors are now able to withdraw from their savings “pot” once per year for a minimum amount of R2000. Retirement contributions are now split between “two pots”, with one-third of savings being invested in the “savings pot” and two-thirds of savings going to the “retirement pot”. The retirement pot remains invested until age 55 (except in exceptional cases), allowing your funds to grow until retirement. The savings pot is available for emergencies - although it is still a good idea to keep the funds invested and allow them to grow. Any capital that was invested before 1 September 2024 will go into a vested pot, which will be governed by the same rules that applied before the implementation of the Two-Pot System in September  2024.  

Retirement annuities are flexible, tax efficient and safe from creditors. You can adjust your monthly contributions depending on your available cash and financial needs at that stage. You are also able to make an additional lump sum contribution if, for example, you had a good month of earnings. Preservation funds, on the other hand, do not allow any further contributions.  

Aiming for low fees 

Both retirement annuities and preservation funds, being retirement investment products governed by Regulation 28 of the Pension Funds Act, are subject to similar types of fees. You can expect to see administration fees, management fees and advisor fees (if you retain a financial advisor). Administration fees are the fees that are charged for the administration costs of the fund, such as reporting and tax administration. Management fees are the fees charged by the fund manager who manages the fund. Advisor fees are those fees charged by advisors for their expertise and advice regarding your retirement annuity and/or preservation fund.  

Over time, these fees can compound, and this can have a significant impact on the growth of your investment over the long term. High fees can erode your capital over time, and this is especially true for preservation funds, where you are not adding any further contributions. You are relying on good returns to grow the investment, so high fees can have an even bigger negative impact. You also need to be aware of additional costs like performance fees, which may be charged based on how well the underlying fund performed, as well as high advisor fees. 

It’s important that you choose a service provider that charges low fees. At 10X, we typically charge fees of less than 1% per annum, depending on the investment product and the amount that you have invested. This is very competitive compared to other service providers, who may charge up to 2,45%, or in some cases, even more.  

EAC or Effective Annual Cost 

The Effective Annual Cost (EAC), which is a measure introduced by ASISA, refers to all the costs and fees associated with your investment. It’s a mechanism which allows you to compare the costs associated with different products and providers. This would include costs such as transaction costs, penalties for early withdrawals, administration fees, management fees and advisor fees. You can use this useful calculator to see what you are paying in fees.  

To see the best return on your investment, your aim should be to avoid having your investment returns depleted by high fees or other costs. What should you do if you feel like your fees are too high? There are a few things you try: 

• You can educate yourself about (and investigate investing in) an index-tracking fund rather than an actively managed fund. The fees associated with an index-tracking fund are typically less than an actively managed fund, as you aren’t paying high research and transaction costs. 
• Regularly review your costs. It’s important to be aware of any fees that you are paying and to review these regularly. You can request an EAC from your service provider to see what you are paying annually in fees. Then, understand what different providers charge and what they offer for that cost. 
• You can request a cost comparison to look further into your current investments and costs. 

Inflation  

Inflation erodes the purchasing power of your money, and this can have a real impact on your retirement savings. It refers to the increase in the price of goods and services each year. So, each year, the same nominal value of money can purchase a slightly smaller basket of goods and services.    

Inflation has historically been around 5% to 6% in South Africa, which doesn’t sound like a lot, but compounded year after year, this can deplete our retirement capital, especially if your investment returns are not beating inflation by a decent margin. For your capital to grow, you need your retirement products to outperform inflation over the long term (and you still have to take into account the costs of your investment). If this isn’t happening, the purchasing power of your investments is being eroded – even though the whole amount might grow, you’re actually losing money. So how do you beat inflation and grow your money?  

• Ensure that you invest in equities as a part of your underlying portfolio. These are growth-orientated assets that have been shown to give the best chance of outperforming inflation over the long term. 
• Regularly review your asset allocation and underlying portfolios to ensure that they are diversified, balancing both risk and growth whilst still meeting your financial needs. If you are unsure of the best mix of assets or whether you are on track to meet your retirement goals, speak to an expert. 

Fund Performance vs. Net Investment Returns 

It’s important to differentiate between fund performance and net investment returns. Fund performance is the total growth of assets in a fund before any fees or taxes have been deducted. Net investment returns refer to the money the investor receives after taxes and fees have been deducted.   

In terms of retirement annuities and preservation funds, fees are the main deduction influencing net returns, as these two vehicles both enjoy tax-free growth (and you’re not drawing any income from them, as you might do from a living annuity or unit trust). 

The Importance of Financial Literacy For Self-Employed Individuals  

It’s important to educate yourself as much as possible to ensure you are financially literate and able to make informed decisions around your savings and retirement. This is even more vital if you are a self-employed individual and you don’t have the luxury of a company pension or provident fund. By coming to terms with the fundamentals of financial planning and saving for retirement, you will be setting yourself up for less stress towards the end of your working life.  

Being aware of high fees and how to avoid them is another key part of being financially literate. The 10X investments website is a wealth of information if you are looking to further educate yourself on investment and retirement products. You can find resources related to all of the core retirement products, useful calculators, information on funds available to invest in, FAQS and more. 

In summary, preservation funds are used to preserve funds which have been transferred from a pension/provident fund while changing employers or looking for a new role. Retirement annuities are a great savings vehicle for those who don’t have a company pensions plan or are self-employed, as you can contribute regularly and adjust contributions as your financial position changes.  

When reviewing and assessing our retirement products, it’s important to focus on net investment returns, making sure that you are aiming to outperform inflation and using service providers with low fees. 10X has low fees and a simplified fee structure with no other hidden costs. If you are a self-employed individual, then becoming financially literate and taking control of your finances is the proactive approach. If you need help with the next steps, then make sure to get in touch with the experienced and qualified consultants at 10X Investments via email or telephone.