All about endowments

Cape Town - Are you a higher income earner looking for an investment that will save you tax, while still following a growth strategy? And maximum liquidity is not a must-have for you? If so, an endowment may be a good option for you.

So says Andre Tuck, investment account manager at Glacier by Sanlam.

"Endowments are after-tax investment vehicles that can hold a variety of underlying investment options, including unit trust investments and the structuring of a share portfolio," says Tuck. There are two main considerations around endowments: tax and estate planning benefits.

"Traditionally, endowments were viewed as expensive - particularly when investors wished to access the funds before the end of the investment term. 

"However, with the so-called new generation endowments, where investors and their advisers can select the underlying investment options, there are no longer any surrender or early termination, penalties." And that's not all: it is the investors, and not the assurance companies, who determine the adviser remuneration, making for a much more investor-friendly investment than the traditional endowments of the past.

Endowments are taxed at a flat rate of 30% for individuals and trusts, which makes them attractive for investors with a marginal tax rate greater than 30%, says Tuck. 

This means that any interest income from the endowment would be taxed at 30%, as against the maximum marginal rate of 40% for individuals. Tuck points out that this also translates into lower capital gains tax of 10%, compared to the maximum rate of 13.33% for individuals.

And think about this: "If an endowment is housed within a trust with natural persons as beneficiaries, capital gains will be taxed at an effective rate of 10%, as opposed to the effective capital gains tax rate for trusts which is 26.64%.

"In the case of individual investors or trusts with natural persons as beneficiaries, the insurance company withholds dividend withholding tax at 15% on all dividend distributions received from South African companies," says Tuck.

But do bear in mind that the Long-term Insurance Act imposes a few restrictions on the number of withdrawals you can make in the first five years; one loan and one surrender are permitted. 

"The maximum withdrawal during this period is limited to the amount invested plus interest at 5%. The balance may be withdrawn after five years," says Tuck.  

Endowment benefits

Is an endowment a worthwhile investment option for you? Here is a quick checklist of the benefits:

* Greater tax efficiency for higher income earners (above 30% tax rate) who have exhausted their interest exemptions.

* Beneficiary nomination can lead to potential savings on executor’s fees (up to 3.99% of fund value).  Where a beneficiary has been nominated, payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly.  

* The proceeds from the endowment do form part of the estate for estate duty purposes. However, the first R3.5m of the value of the estate is exempt from estate duty.    

* Tax administration is taken care of on your behalf (the insurance company calculates, deducts and pays the taxman).

* Insolvency protection – the entire value of the endowment will be protected against creditors after three years. This protection will continue until five years after the termination of the policy.

* You are not restricted to maximum levels of equities and offshore investments, as in the case of retirement savings products.

* You can also use an endowment to draw income upon retirement, as long as the five-year restricted period has passed. You can do this on an ad-hoc basis, without being forced to draw income at specific intervals.

Finding the right product can be daunting, so it is always a good idea to get advice from a properly qualified and independent financial adviser.

 - Fin24

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