Preservation fund: Investment vehicles specializing in early retirement


Preservation funds are specifically designed to preserve accumulated capital for retirement and are an attractive option for people leaving their jobs through layoff, resignation, or layoff. However, preservation funds have unique characteristics and so it is important to fully understand how they work before choosing one.

First, all providers of preservation fund products are subject to the same regulatory framework, with the Pension Funds Act and Income Tax Act being the most notable. When they leave their jobs before retirement, one of the options available to members of the retirement fund is to transfer their retirement money into a preservation fund. Other options include leaving your money in the default investment option of your employer’s pension fund, transferring to your new employer’s pension fund, withdrawing taxable cash funds or invest the capital in a retirement annuity in your name, although it is important to understand the implications of doing so (see below).

Transfers to a preservation fund, whether it is a retirement or provident fund, are tax neutral, as is the case if you are transferring the funds to your new employer’s fund or an RA. However, before making a final decision, it is important to consider whether or not to withdraw from the fund.

Once you’ve made decisions about your withdrawal, the next step is to choose an appropriate strategy for your preservation fund – and this will depend on a number of factors, including when you plan to retire, your risk appetite and the likelihood of having to make a full or partial withdrawal of your investment at some point before retirement.

If you are nearing retirement, your focus will likely be more on preserving capital, while if you have a longer investment horizon, you would likely be able to take more investment risk. When investing in mutual funds, you will have the flexibility to choose your underlying assets, but keep in mind that preservation funds fall within the scope of Regulation 28 of the Funds Act. pension, which in turn will affect the level of risk you can take. to take. This legislation is designed to limit exposure to higher risk assets to ensure that pension fund money is not exposed to excessive levels of risk. However, these restrictions can also serve to limit the returns that investors need to achieve their investment objectives and are therefore somewhat controversial.

Generally, you cannot make additional contributions to your preservation fund unless the money comes from another retirement fund. Also, if you got a share of your ex-spouse’s pension interest under section 7 (8) of the Divorce Act, you can add these funds to your preservation fund. As with other retirement funds, no local dividend or interest tax will be charged to your preservation fund account. Likewise, switching between mutual funds within your fund will not trigger a capital gains tax event.

Before the age of 55, you can make a total or partial withdrawal for each contribution transferred to the fund. If you make a partial withdrawal, keep in mind that you will not be allowed to make another withdrawal related to this contribution and that the remaining money will have to remain invested until retirement or death. Remember, you are free to create as many preservation funds as you want.

It is important to fully understand the tax implications before making a withdrawal, so ideally have your product supplier prepare a tax simulation before making the withdrawal. Once you have given the withdrawal instruction, your service provider will ask Sars for a tax instruction on your behalf and pay you the balance of funds. Remember that in the case of a contingency fund, an early withdrawal will have the effect of proportionally reducing the vested and unvested shares linked to the contribution.

When it comes to formal retirement, you are allowed to withdraw from any of your preservation funds at any time from age 55, although the timing of your retirement should be part of your overall retirement plan. In retirement, you will need to make some critical decisions about choosing an appropriate life annuity or annuity. When you retire from your preservation fund, you have the option of using the full amount to purchase a life annuity or annuity. Remember that in the case of a contingency fund, you can choose to take all or part of the accrued part of the benefit as a lump sum and take out an annuity with the balance.

For the unearned portion, you can make a maximum lump sum withdrawal of one-third, the remaining two-thirds to be used to purchase an annuity. However, when the pre-tax value of your unearned portion is less than R247,500 on the date of retirement, you are allowed access to the full cash amount subject to tax.

Since preservation funds are flexible investment vehicles, investors are free to transfer a fund from one provider to another for any reason, and this process is strictly governed by Article 14 of the pension fund law, but keep in mind that the funds will have to remain in a preservation fund wrapper.

Although the funds invested in your preservation fund are protected by your creditors, it is important to keep in mind that your spouse may be entitled to claim a share of your benefits as part of a divorce settlement, although that much depends 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, while if you are married with the accumulation system, the retirement funds held by one of the spouses will be part of the calculation of accumulation.

Also, keep in mind that the right to claim a share of the pension interest of a participating spouse only applies to married or civil union couples. If a couple live together as “husband and wife” but are not married by virtue of a legal act of parliament, there is effectively no marriage liable to dissolution and therefore no transfer of pension interest. . With regard to preservation funds, pension interest is calculated as the total benefit to which the member would have been entitled under the regulations of the fund if his membership had ended due to resignation on the date of divorced.

In the event that you die before retirement, the money in your preservation fund will be distributed in accordance with section 37C of the Pension Fund Act which provides that the fund trustees use their discretion when distributing your funds. retirement benefits between your dependents and your nominees (i.e. the people named on your policy) based on their financial needs. Keep in mind that benefits from your pension fund are not inherited from your estate and therefore cannot be processed according to your will.

The trustees of the fund are required to undertake a thorough investigation to determine who your dependents were at the time of your death and to allocate the death benefit of the retirement fund proportionately. Your beneficiary appointments are included in this decision-making process but are merely a guide for the Trustees to understand your intentions, they are not legally linked to these appointments. The death benefit is the market value of your investment after all applicable fees and charges have been deducted.


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