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What is a preservation fund?

1 Dec 2022

What is a preservation fund?

In terms of the Pension Funds Act, a preservation fund is like a retirement fund. It’s a great tax-effective investment vehicle designed for individuals who want to make the most of their retirement plan.

If you want to transfer your provident fund to a preservation fund in the event you are retrenched, dismissed, or you resign, you’ll be allowed to do so. Doing so safeguards your accumulated savings as well as the attached tax benefits. You can also invest the proceeds from your provident fund into multiple preservation funds. You cannot however, make contributions to your own preservation fund from other sources. Because of this, your investment will only grow according to its net investment return.

What is the purpose of a preservation fund?

Why preserve? The main objective of your preservation fund is to grow sufficient wealth to cover your basic expenses during retirement. This wealth is accumulated through the return earned by your investments and contributions. If you want to build a good fortune, you must save consistently and diligently throughout your working life. If you fail to take steps to preserve your savings, you may not get any of the returns that your money could have generated for you until your retirement date. Even modest savings can turn into sizeable amounts if invested properly over the long-term, as they compound over time. For example, if you follow a strict 40-year savings plan, the first 13 years will fund half of your pension. In other words, if you retire after 13 years, you will be cutting your pension fund in half!

When can you withdraw from your preservation fund?

Accessing your preservation fund: You are permitted to make either one partial or one full withdrawal from your preservation fund before the age of 55. After the age of 55, you can only access the funds when you retire. You can make one early withdrawal in respect of each transfer to the preservation fund.

What does it cost to maintain a preservation fund?

Costs are a key factor to consider when making an investment. The standard industry preservation fund can be quite expensive, and if you’ve not got the skills or knowledge to do it, it can cost you more in fees than the actual capital you’re seeking to preserve.

That’s a basic explanation of what a preservation fund is. We hope you found this article helpful!