What is a Preservation Fund?

At OUTvest, we continue to be a market-leader when it comes to innovation in the robo-advisor space and we have now introduced Preservation Funds to help our community meet their Retirement goals.  

But what exactly is a Preservation Fund and where does it fit into your financial planning matrix?  

 

Government has recognized that South Africans are notoriously bad when it comes to saving – National Treasury’s 2014 report estimates that only 6% of South Africans will be in a positon to retire comfortably. Frightening statistics especially when one considers the vast number of people living in South Africa.   

 

One of the best ways to help employed South Africans have a disciplined savings regime is to have them save through a company pension or provident fund where both the employer and employee are making regular contributions.  

 

This model works well when employees are committed to the same employer for 10 or 20 years but the new world of work sees employees changing jobs far more frequently. 

 

When employees change jobs, they eye up their retirement savings as a nice pot of money to access, particularly if they have accumulated some debt that they would like to settle. The argument is always: “I have plenty of time to retirement and to rebuild my savings”.  

 

In reality, this doesn’t happen and this is where a Preservation Fund becomes such a valuable tool.  

 

In the event that you resign, are dismissed or retrenched, you can transfer your Pension or Provident Fund into a Preservation Fund without incurring any tax liabilities.  

 

The Preservation Fund is a tax efficient savings vehicle where you pay no tax on returns on the investments generated inside of the fund.  When it comes to withdrawing from your Preservation Fund, you will be taxed differently from the normal personal income tax brackets.  

 

 

Here are some important things you need to consider if you’re contemplating transferring your Retirement Funds (Pension and Provident) into a Preservation Fund:  

 

  • If you are planning on cashing out your Pension or Provident fund for a great holiday around the world … this might be counter-productive in the long-run and you might find it more rewarding to use our Holiday Calculator and rather preserve the capital you have saved up to compound for your retirement

  • Once you have transferred your funds into a Preservation Fund, you will not be able to make additional contributions into it. If you are planning to continue making retirement contributions, you can consider opening up a Retirement Annuity

  • You can make one partial or full withdrawal prior to age 55 but remember that you will be taxed on these withdrawals as per the table below (Tax Treatment of withdrawals BEFORE** retirement). Also these tax bands are cumulative, which means that if you withdraw from other preservation funds and employer funds the amounts withdrawn are added together to determine the tax bracket applicable. 

  • Remember it is not just the tax and penalties that you will face by making an early withdrawal. The longer you allow your investments to compound, the greater your chance of reaching your investment goal. Whenever you eat into your capital amount, you end up losing out on this powerful compounding force  
     
  • There is a difference between a Pension Preservation Fund and a Provident Preservation Fund. The main difference between Provident and Pension Preservation Funds, is the treatment of benefits at retirement (after age 55)

     

    At retirement a member of a Pension Preservation Fund can take up to 1/3rd as a lump sum benefit in cash (subject to taxation), while purchasing an annuity with the rest. A member of a Provident Preservation Fund, can take the full amount as a lump sum benefit in cash. The lump sum withdrawal is also subject to tax implications

  • You can move your Preservation Fund between different service providers 

 

     Tax Treatment of withdrawals BEFORE** retirement

 

Taxable income (R)?

Rate of tax (R)?

0 – 25 000?

?0%

25 001 - 660 000

18% of taxable income above 25 000

660 001 - 990 000

?114 300 + 27% of taxable income above 660 000

?990 001 and above

203 400 + 36% of taxable income above 990 000

 

** As per 2020 SARS Tax Tables

 

  

     Tax Treatment of withdrawals AT** retirement

 

Taxable income (R)

Rates of tax (R)

0 – 500 000

0% of taxable income

500 001 - 700 000

18% of taxable income above 500 000

700 001 – 1 050 000

36 000 + 27% of taxable income above 700 000

1 050 001 and above

130 500 + 36% of taxable income above 1 050 000

 

** As per 2020 SARS Tax Tables 

  

If you are looking to transfer your existing Pension or Provident Funds into a vehicle which attracts some of the lowest fees in the industry, then click here and let’s get the process started.  

 

 

OUTvest is an authorized financial services provider

 

 

 

 

 


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