As tempting as it may be to take a cash pay-out from your retirement savings when you leave a job, it's smart to hold on to your savings. A preservation fund will help you stay on track to become financially independent in retirement and achieve the retirement you aspire to.
Moving to another job? Recently retrenched? If you've been contributing to a pension or provident fund and need somewhere to keep those savings safe until you retire, you can use a preservation fund. Here's a quick look at preservation funds and why they're so important.
What is a preservation fund?
Pension and provident preservation funds are retirement funds specifically designed to receive lump sum transfers from your employer's retirement fund if you leave your employer. Usually, you can also transfer your proceeds from one preservation fund to another subject to restrictions set by SARS from time to time . This allows your retirement capital to stay invested and keep growing, without interruption.
Depending on how long you've been at a job, the amount of retirement savings you've built up can be a substantial amount. If you change jobs, you'll have to decide what to do with the proceeds of your investment.
Can I access my preservation funds before I retire?
Once you transfer your retirement savings into a preservation fund, you're allowed to make one lump sum withdrawal before retirement.
This lump sum amount will be taxed, depending on the value of the withdrawal. So unfortunately, you may then lose a chunk of your savings to tax right away without the benefit of growth over time to make up for it, compared to if you only accessed your benefit when you actually retired.
Why it's so important to preserve your funds instead of being paid out
The number of people choosing preservation are low, largely because people don't fully realise the long term implications of their decisions. It's estimated that when people have the opportunity to preserve their funds instead of taking a cash pay-out, less than 40% of them choose preservation. Not preserving is a major factor in people's inability to eventually retire comfortably.
This is because when you don't preserve your retirement savings, you effectively reset your retirement savings journey. The impact is huge because you won't be able to benefit from compound growth on the amount that you could've preserved (and if you understand how compounding works, you'll know that every year counts). In addition, the new contribution level you need to retire well will jump by a significant amount, depending on the time you have left to retirement.
Preserving is powerful because you can capture the full growth of 25 to 45 years of continuous investing, depending on when you start contributing to a retirement fund and for how long you work in total. Opting for a pay-out may mean that essentially, your retirement savings start from zero again. Those who choose to cash out may not realise their loss until much later, when they retire.
How do I access my funds once I retire?
The great thing about preserving your savings every time you move jobs is the healthy sum you'll have built up by the time you retire. You can then invest in a post-retirement product that will help pay you an income when you're no longer earning a salary.
At retirement, you can withdraw up to a third of your preservation fund money if you wish. The remaining two-thirds must be reinvested into an income generating product like a living annuity. Note that if you invested in a provident preserver fund before 1 March 2021, you may be able to take more than a third of your preservation fund money in cash. Click here to read more.
Remember, while it may be tempting to view a pay-out as an unexpected cash bonus before you retire, saving your money in a preservation fund is the wiser long term option to build your retirement nest egg. Preserving your retirement savings every time you change jobs can help you secure your financial future. If you have financial independence in retirement, you don't depend on your children or the government to take care of you.
This article is not financial advice. Please consult with a financial adviser for financial advice.
Preserve your retirement savings and secure your financial future
Our preserver plans help you preserve your pension or provident fund savings from your previous employer until you retire. We can also uniquely reward you with a boost of up to 20% on your initial investment, with larger boosts for investing longer.
This document is meant only as information and should not be taken as financial advice. For tailored financial advice, please contact your financial adviser. Discovery Life Investment Services Pty (Ltd): Registration number 2007/005969/07, branded as Discovery Invest, is an authorised financial services provider. All life assurance products are underwritten by Discovery Life Ltd. Registration number: 1966/003901/06, a licensed life Insurer,an authorised financial service provider and registered credit provider, NCR Reg No. NCRCP3555. All boosts are offered through the insurer, Discovery Life Limited. The insurer reserves the right to review and change the qualifying requirements for boosts at any time. Product Rules, Terms and Conditions Apply
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