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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. The main considerations when making use of an endowment are the 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. In addition, investors, and not the assurance companies, determine the adviser remuneration – making these investments more investor friendly than the traditional endowments of the past.

Endowments are taxed at a flat rate of 30% in the case of individuals and trusts, making them suitable for investors with a marginal tax rate greater than 30%. Interest income declared within the endowment would therefore be taxed at 30%, as against the maximum marginal rate of 40% for individuals. This also translates into a lower capital gains tax rate of 10%, compared to a maximum rate of 13.33% for individuals.

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.

The Long-term Insurance Act does impose some restrictions on the number of withdrawals that can be made 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 The balance may be withdrawn after five years.

Benefits of an endowment:

  • 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 R3.5 million 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 tax to SARS).
  • 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.
  • Investors are not restricted to maximum levels of equities and offshore investments, as in the case of retirement savings products.
  • Investors can also use an endowment to draw income upon retirement – provided the five-year restricted period has passed. This may be done on an ad-hoc basis, and they are not forced to draw income at specific intervals.

Product selection can sometimes be a daunting process and investors are encouraged to consult with a qualified financial intermediary.

Sanlam Life Insurance is a licensed financial service provider.
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