By Andre Tuck, 4 July 2014
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 The balance may be withdrawn after five years.
Product selection can sometimes be a daunting process and investors are encouraged to consult with a qualified financial intermediary.