Preservation & Provident
When you leave an employer the money in the fund becomes a decision, and it is one of the few financial decisions most people make once, quickly, and without advice. A preservation fund is where a pension or provident benefit goes so that it stays invested, stays untaxed, and stays yours until retirement.
Cashing out is the expensive option and it rarely looks like one on the day, because the tax comes off before the money arrives and the larger loss never appears on a statement at all. This page is about the alternatives and what each of them costs.
Cover
What this typically covers
Preserving a benefit on exit
The money moves out of the employer's fund into one in your own name, and nothing is taxed because nothing was taken. It carries on being invested, and it stops being an administrative loose end at a company you no longer work for.
Transfer of an accumulated pension or provident benefit into a preservation fund on leaving employment, without triggering a withdrawal.
The options on leaving
There are four things you can do with it and only one of them is taxed. Which of the other three suits you depends on how good the new employer's fund is. It is a short conversation with a clear answer.
Transfer to a new employer's fund, to a preservation fund, or to a retirement annuity, as against withdrawal in cash.
What a withdrawal really costs
Two costs, and the second one is invisible. You pay tax now, and the amount you took is counted again against your retirement lump sums years later. The compounding you lose cannot be bought back by contributing harder afterwards.
The tax charged on the withdrawal, and the aggregation of that amount against later retirement lump sums.
Pension and provident, and what changed
Provident funds used to allow the whole benefit in cash at retirement and largely no longer do, while what you had built up before the rules changed keeps its old treatment. Two people with the same balance can have different rights, depending on when the money went in.
The alignment of provident fund benefits with pension fund annuitisation, and the vested rights preserved for amounts accumulated before that change.
Access before retirement
A preservation fund has historically allowed one withdrawal before retirement, and the two-pot rules changed how that works for money moved across since. What applies to your benefit depends on when it was transferred, which is worth asking about before you rely on the answer you remember.
The limited pre-retirement access historically permitted from a preservation fund, and its treatment under the two-pot arrangement.
What can reach a fund benefit
A retirement benefit is protected from creditors, with a short list of exceptions. A divorce order, a maintenance claim and an employer's proven claim for fraud or damage can all reach it. Very little else can.
Divorce orders, maintenance claims, and an employer's claim in respect of proven fraud or damage, each permitted against a fund benefit by statute.
Limits
What this will not cover
Nobody here can promise a return
The same rule as everywhere else in this class. Market-linked money falls as well as rises, past performance describes the past, and an expected outcome is an assumption rather than a fact.
Locked, apart from the narrow exceptions
Preserved money is not generally available before the stated retirement age. The exceptions exist, they are defined in legislation rather than by circumstance, and they are not a reason to treat this as accessible savings.
The tax on a withdrawal does not come back
A withdrawal is taxed when it is made and then counted against your later retirement lump sums. Putting the money back afterwards is not possible, and contributing more later does not undo the aggregation.
Doing nothing is also a decision
A benefit left behind in a former employer's fund is still invested and still yours, and it can also end up unclaimed if the fund loses touch with you. Nobody there is reviewing it on your behalf. Leaving it is a choice worth making deliberately rather than by default.
Claim
When you claim
There is no claim, and there is a deadline
What happens on exit is an instruction rather than a claim, and the fund gives you a window in which to give it. Miss that window and the fund applies its default, which may or may not be what you would have chosen.
The tax directive comes first
Any payment, whether a transfer or a withdrawal, goes through a tax directive from SARS. A transfer is directed at nil tax and a withdrawal is not, and the difference is settled before the money moves.
At retirement, the same two decisions
How much is taken in cash, and what the balance buys. Preserved money reaches the same fork as every other retirement benefit, and the vested rights attaching to older provident money can change what is available to you there.
Questions
Frequently asked questions
The arithmetic is fixed even though the right answer for you is not. The tax is charged immediately, the amount is counted again against your retirement lump sums years later, and the compounding on money that is no longer invested is not recovered by contributing more afterwards. A transfer is not a taxable event and leaves all three alone. Which applies to your circumstances is worth establishing before you sign anything.
Pension and provident funds are run by an employer and you belong to them while you work there. A preservation fund is where either one goes when you leave, held in your own name. The historical difference between pension and provident was how much could be taken in cash at retirement, and that difference has largely been aligned, with rights preserved for what was built up before the change.
Yes. A preservation fund can be transferred to another preservation fund or to a retirement annuity, and the transfer itself is not a taxable event. What is worth checking first is what the move does to any pre-retirement access you have not used, and to vested rights attaching to older provident money.
It stays invested and it stays yours, and nobody there is looking after it on your behalf. Funds lose contact with former members often enough that unclaimed benefits are a standing problem in this industry. If you have left a benefit behind, find out where it is and what it is invested in, then decide deliberately whether to leave it.