Should I transfer to a preservation fund or a retirement annuity?

When leaving your job, you might wonder whether to transfer your retirement savings to a Preservation Fund or a Retirement Annuity (RA). The key is understanding that these products serve different purposes and have different rules about what money can go where.

Understanding your options

A Preservation Fund is specifically designed to receive and preserve retirement savings from employer pension or provident funds when you change jobs. It maintains the character of your original fund - a pension fund balance goes to a pension preservation fund, and a provident fund balance goes to a provident preservation fund.

A Retirement Annuity, on the other hand, is an individual retirement savings vehicle that you open in your own name. While it's excellent for building additional retirement savings, you cannot transfer employer pension or provident fund savings directly into an RA.

Key differences to consider

Contributions: With a Preservation Fund, you typically cannot make additional contributions after the initial transfer. It's designed to preserve and grow your existing retirement savings.

An RA allows ongoing contributions, making it ideal for continuing your retirement savings journey. You can contribute regularly or make lump-sum deposits, and you'll receive tax benefits on these contributions.

Access rules under the two-pot system: Both Preservation Funds and RAs now follow the two-pot system, which divides your savings into components:

• The savings component allows one withdrawal per tax year
• The retirement component stays invested until retirement
• The vested component (pre-September 2024 savings) follows its original fund rules

Making your decision

If you're leaving your job, a Preservation Fund is typically the most appropriate choice for your existing employer retirement savings. It's specifically designed for this purpose and maintains the tax benefits of your current retirement savings.

However, you might also consider opening an RA separately to continue building your retirement savings, especially if your new employer doesn't offer a retirement fund or if you want to supplement your employer's retirement benefits.