South Africa has a preservation problem. Most people who resign, get retrenched, or move jobs end up cashing out their retirement fund rather than preserving it, and it is one of the biggest reasons so few South Africans retire comfortably. If you are facing this decision right now, the choice you make in the next few weeks can be worth hundreds of thousands of rands by the time you actually retire.
Your Three Options When You Leave a Retirement Fund
When you resign or are retrenched from an employer with a pension or provident fund, you generally have three choices for that money:
- Cash it out. You receive the money now, but it is taxed according to SARS’s retirement lump sum withdrawal tables, and once used, that retirement provision is gone for good.
- Transfer to a preservation fund. Your full balance moves across tax-free, continues growing, and you are allowed one withdrawal before retirement if you genuinely need access.
- Transfer to a retirement annuity (RA). Your full balance moves across tax-free, but unlike a preservation fund, you cannot access it at all before age 55, except in specific, limited circumstances.
What Cashing Out Actually Costs You
SARS taxes retirement lump sum withdrawals (before retirement) on a sliding scale, with the first R27,500 tax-free and increasing tax rates above that, up to 36% on amounts over R990,000. Beyond the immediate tax bill, you lose decades of compound growth on that capital. Someone who cashes out R300,000 at age 35 instead of preserving it can lose well over R1 million in retirement capital by age 65, purely from lost growth, before even accounting for the tax paid upfront.
Preservation Fund vs Retirement Annuity: The Real Differences
| Feature | Preservation Fund | Retirement Annuity |
|---|---|---|
| Accepts transfers from a pension/provident fund | Yes | Yes |
| Accepts new monthly contributions | No | Yes, and contributions are tax-deductible |
| Access before retirement age | One withdrawal allowed, ever | Generally none before 55 |
| Earliest retirement age | 55 | 55 |
If there is any realistic chance you might need part of this money before retirement, for example to clear high-interest debt or cover a genuine emergency, a preservation fund keeps that door open. If you are certain you will not touch it, and you also want to keep contributing to it monthly with a tax deduction, a retirement annuity does more work for you long-term.
How the Two-Pot Retirement System Changes This
Since the two-pot retirement system came into effect on 1 September 2024, new retirement fund contributions are split into a savings pot (one-third) and a retirement pot (two-thirds). The savings pot can be accessed once per tax year before retirement, subject to normal income tax, while the retirement pot must be preserved until retirement. This applies to preservation funds and retirement annuities going forward too, so a portion of your transferred balance may already sit in a savings pot you can access if genuinely needed, without cashing out the whole amount.
What We Would Actually Ask You
The right choice depends on your specific situation, not a general rule. We would look at: whether you have other emergency savings, how much high-interest debt you are carrying, your age and years to retirement, and whether you want to keep contributing to this specific fund going forward.
This article is for general information purposes only and does not constitute financial advice. Tax treatment depends on your individual circumstances and current SARS tables. Own Your Wealth Solutions (Pty) Ltd is an Authorised Financial Services Provider, FSP No. 54342.
Leaving a job and not sure what to do with your retirement fund? Book a consultation with Renney before you make the call, it is far easier to preserve the money now than to rebuild it later.
