A preservation fund is not like a cheque account

Many people misunderstand what a preservation fund is. They think it works like a cheque account that they can dip into when needed. It does not. A preservation fund is there to protect and grow your retirement money for later not for everyday spending or easy access to cash.

What is a preservation fund?

A preservation fund lets you keep your retirement savings invested when you leave a job instead of taking the money in cash. The money comes from a pension or provident fund you belonged to.

It is a regulated retirement product meant to encourage long-term saving. In some cases, you may be allowed limited access to the money, but it is not a bank account and it does not offer the same flexibility as a cheque account.

Read: Preservation funds unpacked: A critical decision point when changing jobs

When can you choose to preserve?

The rules are different for each of the pots created under the two-pot legislation. The vested pot is the money you had before 1 September 2024. The savings pot is 1/3rd of new contributions and you can withdraw this once every tax year.

The retirement pot is 2/3rd of new contributions and you can’t take this in cash; it will be used to buy your retirement income.

You can choose preservation when you leave a job, whether you resign, are retrenched, are dismissed, or when you retire, but don’t need access to your money at that stage. At that point, you have a few options on what to do with your retirement funds.

• Taking the benefit in cash (subject to tax).  You can take your savings pot and vested pot, but not your retirement pot. The tax you pay when you withdraw is higher than tax on cash at retirement. retirement.
• Transferring the benefit to another employer fund. All pots can be transferred
• Transferring the benefit to a preservation fund. All pots can be preserved
• Transferring to a retirement annuity (where applicable). All pots can be transferred to a retirement annuity
• You can also leave your funds as they are in the fund, but you will not be able to make further contributions or be covered for any risk cover you had while you were an active member of the fund.

Read: Navigating retirement savings when changing jobs

Why do people choose preservation?

People usually choose preservation because:

• they do not need the money straight away
• they want to avoid paying unnecessary tax
• they want their retirement savings to stay invested and keep growing
• they want to protect future access rights, especially to the vested pot

In short, it is about looking after your future rather than spending the money now.

Common mistakes people make

Even with good intentions, people often make avoidable mistakes and they:

1. Assume they can keep making withdrawals. You can only withdraw once from your vested pot before retirement, either a full or partial withdrawal, but you can withdraw from your savings pot once a year.
2. Think they can pay extra money into the fund. A preservation fund accepts transfers from approved retirement funds but not regular deposits. As you do not contribute to a preservation fund, once you have taken all your vested pot and savings pot you won’t have access to any more cash. You must use all your retirement pot to buy an income for your retirement.
3. Believe they can borrow against the fund. They cannot. Preservation funds do not offer loans.

Read: Preservation funds: Keeping your retirement savings on track

How to make a careful decision

If you are thinking about preservation, slow down and plan carefully:

• Give yourself time to think. Do not make a rushed decision just because you have left your job; the money stays in the fund until you decide.
• Ask whether in-fund preservation is available and how it compares with a retail preservation fund on cost, flexibility and investment choice.
• If you are considering a withdrawal, weigh your short-term needs against your long-term retirement goals. Remember that access is limited, but you can take a portion of your funds from your employer fund before transferring the rest to a retirement fund, where you will have your once-off withdrawal from the vested pot.
• Understand the tax impact. Early withdrawals are taxed less favourably than money taken at retirement, which can reduce what you end up with later.

A preservation fund is not a cheque account. It is not meant for regular access or day-to-day spending. Its job is to protect your retirement savings and help you retire with more money.

The key point is simple: think carefully before moving or withdrawing your retirement money. Preservation can be a smart choice, but only if you understand the rules and how they affect your future.

If you are unsure, speak to a financial adviser who can help you make the right decision for your circumstances.