Preservation funds: A repository for company-sponsored funds

Upon leaving your employment as a result of resignation, retrenchment, or dismissal, one of the options you have for your retirement funds is to transfer them to a preservation fund. As a repository for the proceeds of company-sponsored retirement funds, preservation funds have some distinctive features that investors should be aware of. Here’s what to know.

Understanding your options

All preservation funds are subject to the same regulatory framework, with the Pension Funds Act and Income Tax Act being the most notable. When leaving employment before formal retirement, preserving your accumulated retirement fund benefits in a preservation fund structure may be an attractive option although it is important to understand the other available options. Depending on the rules of your existing employer’s retirement fund, you may have the option of leaving your funds in their retirement fund. Alternatively, you may want to consider transferring your funds into a retirement annuity in your own name – an option that will allow you to make additional contributions towards the fund going forward. Naturally, you have the option of withdrawing your funds as cash, although this will have tax implications as you will be taxed according to the retirement withdrawal tables. Importantly, withdrawing your money in cash will interrupt the effects of compounding growth which can have significant consequences for your future retirement planning.

Note: Before transferring your capital into a preservation fund, make sure that you fully understand all available options. Keep in mind that transferring your funds into a preservation fund or retirement annuity is a tax-neutral transaction.

Your investment strategy

Firstly, as preservation funds fall within the ambit of the Pension Funds Act, keep in mind that your investment diversification will be limited by Regulation 28 of the Pension Funds Act which is designed to protect retirement fund investors against poorly diversified investment portfolios. In terms of this piece of regulation, your offshore exposure will be limited to 45% of the portfolio value and an equity asset class limit of 75%. That said, keep in mind that preservation funds are highly tax-efficient in that no local dividend tax or tax on interest is payable, and switches between unit trusts within your fund will not trigger a capital gains event. It is essential to choose an investment strategy that is aligned with your investment goals, time horizon, and propensity for investment volatility to ensure that your preservation fund is fit for purpose. For example, if you have a longer investment horizon, you may be able to take on more investment volatility whereas, if you’re heading towards formal retirement, you may want to consider weighting your strategy towards capital preservation depending on your circumstances.

Note: Whatever underlying strategy you choose for your preservation funds, be sure to review your investment strategy at least annually to ensure that it remains appropriate to your overall portfolio.

Withdrawing from your preservation fund

A notable benefit of investing in a preservation fund is that you are permitted to make one full or partial withdrawal from the fund before the age of 55 – an attractive option, especially for those who are unsure of their future employment prospects. However, it should be noted that while the first R27 500 withdrawn is taxed at zero percent, the balance will be taxed on a sliding scale as per the retirement withdrawal table. Remember, in the case of a provident preservation fund, an early withdrawal will have the effect of proportionately reducing the vested and unvested portions related to the contribution. However, it is important to note that the initial R27 500 withdrawal is aggregated across all your preservation funds, so bear this in mind if you have previously made a withdrawal from a preservation fund.

Note: If you are unsure whether you’ve made a previous withdrawal, you can request your service provider to prepare a tax simulation for you which will provide clarity on how you will be taxed.

Contributing to your preservation fund

Generally speaking, you may not make any additional contributions to your preservation fund, so keep this in mind when deciding what to do with your retirement fund benefits, except where the money originates from another retirement fund. Further, if you’ve been awarded a share of your spouse’s pension interest as part of your divorce order, you are permitted to add these benefits to your preservation fund. Because preservation funds are flexible investment vehicles, investors are free to transfer a fund from one provider to another for whatever reason, and this process is strictly governed by Section 14 of the Pension Funds Act, although bear in mind that the funds will need to remain in a preservation fund wrapper.

Note: Keep in mind that pension fund benefits will need to be preserved in a pension preservation fund, while provident fund benefits will need to be preserved in a provident preservation fund. You cannot transfer pension fund proceeds to a provident preservation fund unless you’re willing to pay withdrawal lump sum tax on the transfer.

Options at retirement

When it comes to formal retirement, you are permitted to retire from any of your preservation funds at any time from age 55 onwards, although keep in mind that there is no upper age limit at which you must retire from a preservation fund. When retiring from a pension preservation fund, you have the option of commuting up to one-third of the proceeds as cash, with the first R550 000 (aggregated across all retirement funds) being taxed at zero percent, while the remaining two-thirds must be used to purchase an annuity income. When retiring from a provident preservation fund, you have the option of withdrawing the full vested portion in cash, whilst for the unvested portion (i.e. in respect of those contributions made post-1 March 2021), you are permitted to take up to one-third in cash while the remaining two-thirds must be used to purchase an annuity income.

Note: Where the pre-tax value of your unvested portion is less than R247 500 at the date of retirement, you are permitted to access the full amount in cash subject to tax.


Being an approved retirement fund, bear in mind that your spouse may be entitled to claim a share of your benefits as part of a divorce settlement, although this will depend largely on the nature of your marriage contract. If you are married in community of property, you will be entitled to 50% of your spouse’s pension interest as any retirement benefits form part of the joint estate. If you are married with the accrual system, the value of any retirement funds held by either spouse will form part of the accrual calculation at divorce should they not have been expressly excluded in the anti-nuptial agreement.

Note: The pension interest in respect of preservation funds is calculated as the total benefit to which the member would have been entitled in terms of the fund rules if their membership had terminated due to resignation at the date of divorce.


Falling within the ambit of the Pension Funds Act, the money in your preservation fund will be distributed amongst your financial dependants (i.e. those who are found to be financially dependent on you, either wholly or in part, at the time of your death) in accordance with Section 37C of the Pension Funds Act. Thus, when developing your estate plan, do not lose sight of the fact that your preservation fund benefits fall outside of your estate and that the distribution of these benefits will be determined by the retirement fund trustees.

Note: While Section 37C may impose certain limitations in respect of the distribution of your retirement fund benefits in the event of death keep in mind that, as these assets are not included in your deceased estate, they will not be subject to estate duty nor executor’s fees.

As is evident from the above, preservation funds are an attractive option for those wanting to preserve their retirement capital while still providing the opportunity for once-off access to funds before formal retirement. That said, they are highly regulated investments and it is important to fully understand the mechanisms of a preservation fund before selecting it as an option in your overall portfolio.

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