Preservation Funds Q&A

As with Life and Living Annuities (“Life and Living Annuities Q&A”), I often find that there is a great deal of confusion and misunderstanding around preservation funds, and how they work.

To address this confusion, we have compiled a brief Q&A which aims to promote a better understanding of preservation funds, how they work, and their benefits…

Why have a preservation fund?

By transferring money from a pension or provident fund into a preservation fund, you are able to preserve your pension or provident fund benefits for retirement.

Can I withdraw from my preservation fund before I retire?
Yes, you are allowed one taxable withdrawal before retirement. The first R25 000 is tax free.

What is the taxation on a preservation fund?
The growth in the preservation fund is not taxed, and there is no Dividend Withholding Tax.   As a result, under current tax laws you can enjoy tax-free investment growth in a preservation fund.

Is there a tax liability if I transfer from a pension or provident fund into a preservation fund?
No, there is no taxation on this transfer.

When would I be able to retire from a preservation fund?
You can retire from age 55. However, you do not have to retire at 55 and can remain invested in the fund.
Earlier retirement may be permitted in the case of permanent disability.

What happens when I retire from a preservation fund?

  • If it is a Provident Preservation Fund, you can choose to have the full investment value paid out as cash. – Updated see “Key Changes to Provident Fund Withdrawals”
  • If it is a Pension Preservation Fund, you can choose to have up to one-third of the investment value paid out as a cash lump sum, subject to tax.  The remaining two-thirds must be used to buy a life or living annuity. Refer to our recent article “Life and Living Annuities Q&A”.

Are there any restrictions as to how the money can be invested in the preservation fund?
Yes, preservation funds are governed by the Pension Funds Act and they have to be Regulation 28 compliant. This means that the maximum exposure to the various asset classes is prescribed as follows:

75% in equities (shares)
25% in property
45% in offshore assets (Updated March 2022)

Is there an estate duty?
No, there is no estate duty.

Sourced from Momentum and Old Mutual.