Question:
What are the advantages of investing in a preservation fund?
Answer:
David,
A preservation fund preserves not only you retirement savings, but also the attached tax benefits. You can transfer a provident fund to a provident or pension preservation fund, or a pension fund to a pension preservation fund. The transfer will not attract tax, the investment income earned by the preservation fund is not taxed, and on retirement, any lump sums you take are taxed according to the retirement rather than the (less favourable) withdrawal lump sum tax tables.
Preservation funds are flexible in that you can make one full or partial withdrawal for every transfer into the preservation fund (although the intention is to preserve your money until retirement!). The one draw-back is that you cannot contribute to a preservation fund.
Not all preservation funds are created equal. Ensure that the underlying investment costs, investment style, asset allocation strategy and reporting transparency meets your needs. Avoid paying entry fees and commissions if at all possible. If you are joining a new employer’s workplace fund, and you are not sure whether you should transfer your proceeds to that fund or not, then compare the two funds on the above set of principles. Do not subject your lifetime savings to unnecessary or high costs, as it can ruin your retirement.
