For many South Africans, the moment of changing jobs represents far more than a career transition – it’s an important inflexion point in your financial life, where the decisions you make can have consequences that extend far beyond your immediate circumstances. Whether through resignation, retrenchment or dismissal, what you choose to do with your accumulated retirement savings at this point can have a lasting impact on your financial future. Preservation funds are specifically designed to protect and preserve these savings, yet they remain widely misunderstood – and, while they offer a compelling solution in many cases, they are not a default answer. Understanding how they work, when they are appropriate, and how they fit into your broader financial plan is essential.

What is a preservation fund, and what is it used for?

Simply put, a preservation fund is a specialised pre-retirement investment vehicle that allows you to transfer your accumulated retirement savings from an employer-sponsored fund when you leave employment, without triggering an immediate tax event. It acts as a holding structure for your retirement capital, allowing those funds to remain invested and continue compounding until retirement. The primary purpose is to prevent the erosion of long-term savings at a time when many investors are tempted to withdraw their funds in cash.

The role preservation funds play in a financial plan

At its core, a preservation fund is both a structural and behavioural tool. Structurally, it allows you to retain control over your investment strategy outside of an employer fund, whereas behaviourally, it introduces a level of discipline by limiting access to your retirement capital. From experience, we have seen that cashing out retirement savings when changing jobs is one of the most destructive financial decisions investors make because, not only does it trigger immediate taxation, it also permanently interrupts the compounding process – often at a stage when time is your greatest advantage.

Key rules that define preservation funds

While preservation funds are flexible in certain respects, they are governed by a number of important rules, which include:

• No ongoing contributions: You cannot make additional contributions to a preservation fund after the initial transfer, unless the funds originate from another retirement fund.
• One withdrawal before retirement (vested component): Historically, preservation funds allowed one full or partial pre-retirement withdrawal in respect of each amount transferred into the fund, subject to the rules of the fund. Under the two-pot system, this once-off rule continues to apply to the vested component, while the savings component created through seeding — and, where applicable, through transferred savings-component amounts — may be accessed once per tax year, subject to the legislative rules and tax treatment.
• Retirement age: You may retire from a preservation fund from age 55 onwards.
• Regulation 28 compliance: Investments are subject to Regulation 28 of the Pension Funds Act, which limits exposure to certain asset classes in order to manage risk.
• Tax efficiency: No tax is levied on interest, dividends or capital gains within the fund, and switching between underlying investments does not trigger tax.

Accessing your funds: Rules and implications

One of the defining features of a preservation fund is the once-off withdrawal rule prior to retirement, keeping in mind that under the new two-pot system, this once-off rule applies only to the vested component. Your newly created savings component allows one withdrawal per tax year, taxed at your marginal rate. Any pre-retirement withdrawal reduces the capital available for long-term growth. If a partial withdrawal is made, the remaining balance must stay invested until retirement, with no further vested-component access.

At retirement, the way in which benefits may be taken depends on the type of preservation fund and the composition of the benefit. Pension preservation funds generally remain subject to annuitisation rules, while provident preservation funds may retain more favourable cash-commutation rights in respect of vested portions.

Pension vs provident preservation funds: What matters in practice

There are two types of preservation funds – pension and provident – and while the distinction has narrowed over time, it still has practical implications. Historically, provident funds allowed full commutation at retirement, whereas pension funds required that a portion be used to purchase an annuity. Legislative changes have largely aligned these rules for newer contributions, but older provident fund balances may still carry vested rights that allow more favourable lump sum access. Without becoming overly technical, the key point is that your preservation fund may consist of different components – vested and non-vested – each with its own treatment at retirement. Understanding this composition is important when planning how and when to access your benefits.

How the two-pot retirement system affects preservation funds

The introduction of the two-pot retirement system has added complexity to retirement planning, but its impact on preservation funds is more nuanced. Preservation funds do not receive ordinary ongoing member contributions, but since 1 September 2024, they can contain vested, savings and retirement components, both through once-off seeding and through transfers from other approved retirement funds. However, all preservation funds will receive a once-off seeding capital allocation of 10% of the fund value (capped at R30 000) into a new savings component, even though no new contributions are made. This means members who previously used their once-off withdrawal under the old rules will still gain limited new access through the savings component.

In practice, this means that while the overarching preservation fund rules still apply, the internal composition of the fund may influence how benefits are accessed and taxed over time. The once-off withdrawal rule remains relevant, but it operates alongside these underlying components.

Transfers, protection, and estate considerations

Preservation funds are highly portable, and investors are free to transfer their investment from one provider to another in terms of Section 14 of the Pension Funds Act, provided the funds remain within a preservation structure. From a protection perspective, preservation-fund assets enjoy meaningful statutory protection, but that protection is not absolute and can be limited in cases such as divorce, maintenance, certain compensation claims and tax deductions. Note that, in the event of divorce, your spouse may have a claim against your retirement benefits depending on your marital regime.

It’s also important to note that in the event of death before retirement, the distribution of your preservation fund is governed by Section 37C of the Pension Funds Act. This means that the fund trustees, not your will, determine how the benefit is allocated among your dependants and nominees, based on their financial needs. As such, your beneficiary nomination serves as a guide but is not binding.

Ultimately, preservation funds serve as a reminder that building long-term wealth is not only about what you do consistently over time, but also about the decisions you make at critical inflection points. The moment of changing jobs is one of those rare decision points where a single choice can either protect years of accumulated capital or quietly undo it. That said, while preservation funds offer a disciplined and tax-efficient mechanism to safeguard your retirement savings, they should not be viewed in isolation, but rather in the context of your broader financial plan, your behaviour, and your long-term objectives.

Have a super day.

Sue