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Busting financial-planning jargon

Various funds, policies, benefits and taxes explained.

As part of Financial Planning Week 2019, one of our aims is to simplify some commonly-used terms in the financial-planning industry to make them easily understandable to the person on the street.


An endowment is a policy contract with a minimum investment period of five years, following which the proceeds are tax-free. The policy provides a ‘wrapper’ around various funds which may be invested in assets such as equities, property, bonds and cash. Income earned is taxed inside the endowment owned by an individual at a flat rate of 30%. As such, endowments offer effective tax benefits to those people in a 30%-plus tax bracket. It also makes an effective estate planning tool as beneficiaries may be paid out straight away in the event of your death, and the proceeds are not included in your estate when you die.

Money market fund

A money market unit trust fund is a safe, secure and reliable investment. It is an ideal vehicle for short-term savings, emergency funds or to park assets for short periods of time. Money market funds offer more favourable interest rates than savings accounts, although they will struggle to keep pace with inflation over the long-term, taking taxation into account. Money held in a money market fund can be accessed easily upon written instruction from the investor and generally, no fees are charged for withdrawals.

Living annuity

The proceeds of a retirement fund (pension, provident or retirement annuity) – or part thereof – must be used to buy an investment, such as a living annuity, that will pay out a retirement income. A living annuity is a flexible post-retirement investment product that allows you to draw a regular income, the level and frequency of which can be varied according to your changing cashflow needs.

A living annuity allows your funds to be invested into a personalised investment portfolio managed according to your risk profile. Investors are permitted to choose their annual level of income between 2.5% and 17.5% of your portfolio value. Investors may also decide on the frequency of their income payments – monthly, quarterly, bi-annually or annually.

At death, the money available in your living annuity will not be forfeited but can be transferred to your nominated beneficiaries. Like a retirement annuity (RA), the money that you invest in a living annuity is deemed to fall outside of your estate and can therefore not be touched by creditors. It is also excluded from estate duty calculations.

Retirement annuity

Unit trust-based RAs are a new generation of retirement annuities that offer investor flexibility, more transparency and greater cost-effectiveness. Investors are permitted to invest up to 27.5% of their taxable income – less any amount that is being contributed towards a pension or provident fund – tax-free into an RA (up to a maximum of R350 000 per year). Over and above the obvious advantage of investing with before-tax money, tax and CGT are not charged on the investment returns achieved in an RA. Further, the money that you invest in an RA is deemed to fall outside of your estate and can therefore not be touched by creditors and is excluded from estate duty calculations.

Income protection benefit

An income protection benefit is designed to replace your income, or a portion of your income, should you become disabled and unable to generate an income. While you are young and still accumulating your wealth, your ability to generate an income is your greatest asset and should be protected at all costs. When taking out an income protection benefit, you will need to determine what level of income you would like to insure and until what age. In general, most income protection benefits cease at age 65, although this can depend on the insurance company. When deciding what income you would like to protect, you should take into account your debt, retirement funding shortfalls and monthly living costs. It is important to ensure that, when putting an income protection benefit in place, the income keeps pace with inflation. Bear in mind that an income protector does not cover income lost as a result of retrenchment. 

Capital disability benefit

Capital disability cover is insurance that provides you with a lump-sum payout if you become disabled. This payout can be used to cover the costs associated with your disability such as a wheelchair, medical equipment, remodelling of your home or vehicle, or settling your home loan.

Severe illness benefit

Severe illness cover, sometimes also referred to as dread disease insurance or critical illness cover is lump sum insurance cover that pays out on the diagnosis of a serious illness such as cancer or heart disease. Severe illness cover changes from insurer to insurer, so it is essential to read the small print to determine exactly which illnesses are covered and how severe they need to be in order for it to pay out. Almost all policies cover cancer, stroke and heart disease. 

Provident fund

A provident fund is a retirement fund offered by employers to their employees as part of their contract and is governed by the Pension Funds Act. Both the employee and employer contribute to the provident fund and enjoy a tax deduction on the contributions. When the member reaches retirement age, they are able to access the full fund value as a lump sum. They can also elect to only withdraw a portion and reinvest the balance in an annuity. The withdrawal lump sum will be subject to tax.

Pension fund

Similar to a provident fund, a pension fund is a retirement fund that is governed by the Pension Funds Act. It is common for both employer and employee to contribute to the pension fund while enjoying a tax deduction on the contributions. At retirement, a maximum of one-third can be available as a lump sum, which will be subject to tax by applying the retirement lump sum tax table. The remaining funds in the pension must be used to purchase an annuity income. Members may also choose to apply the full fund value to provide for the pension, so it is not compulsory that a lump sum must be taken. Members of a provident fund have access to the full fund value upon retirement, subject to the same lump sum retirement tax tables.

Preservation fund

This is a retirement fund designed specifically to invest the proceeds of your pension or provident fund. You may transfer your proceeds to such a fund in the event of dismissal, retrenchment or resignation. A preservation fund preserves both your retirement investment and the tax benefits. The transfer is not taxed provided you move your savings from a pension fund to pension preservation fund, or from a provident fund to a provident preservation fund. You cannot, however, make contributions to your preservation fund. Members are permitted one partial or full cash withdrawal from their preservation fund at any time before retirement. On retirement from a pension preservation fund, you may take a maximum of one-third of your lump sum as cash. An annuity income must be purchased with the balance. On retirement from a provident preservation fund, you can elect to receive the entire balance as a cash lump sum.

Tax-free savings account (TFSA)

Tax-Free Savings Accounts (TFSAs), which were introduced to South Africa in March 2015 as part of non-retirement savings, allow people to save up to R33 000 per year in specially designated savings accounts, with a lifetime limit of R500 000. TFSAs are offered by asset managers, insurance companies and banks, and funds can be invested in equities, fixed income accounts or both. All proceeds, which include interest income, capital gains and dividends from these accounts, are tax-free. Fee charges do vary from provider to provider, so it is important to shop around for the lowest rates.

Estate duty

Estate duty is levied on the property of residents and the South African property of non-residents less allowable deductions. The duty is levied on the dutiable value of an estate at a rate of 20% on the first R30 million and at a rate of 25% above R30 million. A basic deduction of R3.5 million is permitted in the determination of an estate’s liability for estate duty. In the case of married couples, the first-dying spouse can roll-over his abatement to the surviving spouse, meaning the surviving spouse can use a R7 million abatement on death. It remains the responsibility of Sars to collect estate duty. 

Capital gains tax 

Capital gains tax (CGT) is not a separate tax but forms part of income tax. A capital gain arises when you dispose of an asset on or after October 1, 2001, for proceeds that exceed its base cost. Capital gains are taxed at a lower effective tax rate than ordinary income. Pre-October 1, 2001 CGT capital gains and losses were not taken into account. Not all assets attract CGT and certain capital gains and losses are disregarded. CGT applies to individuals, trusts and companies, but retirement funds and Tax Free Savings Accounts are exempt from CGT.

Collective investment scheme

Collective investments or unit trusts are transparent and well-regulated investment vehicles which are well-suited to a wide range of investment objectives. A unit trust owner is essentially a unit holder in a fund that, in turn, invests its money in a wide range of assets, including shares, property, bonds and/or money market instruments, depending on the mandate of the fund. The Collective Investment Schemes Control Act, Act No. 45 of 2002 regulates the administration, management and sale of collective investments. Distinct advantages of unit trusts are that they include professional portfolio management, the ability to diversify a portfolio cost-effectively, relatively low transaction costs and the ability to buy and sell at will. CGT is triggered when an investor sells a unit or units. The CGT is levied on the difference between the purchase price and the final sale price of a unit trust in the case of lump-sum investments, or the average acquisition price in the event of debit order investments.

Balanced fund

A balanced fund is a mutual fund that contains an equity component, a bond component and sometimes a money market component in a single portfolio. In general, these funds provide a balance between equity and debt, hence the name ‘balanced’. Balanced funds are attractive to investors looking for a combination of safety, income and modest capital appreciation. A balanced fund is generally appropriate for an investment term of three years or longer and is used to create steady, long-term wealth for investors.


A multi-manager specialises in building investment portfolios using a variety of different asset managers. Multi-managers work on the principle of spreading investment risk across a range of asset managers in order to reduce the risk that investors who invest solely with one asset manager are exposed to. The role of a multi-manager is to analyse and select combinations of asset managers who they believe can best fulfil a pre-determined investment mandate. Larger multi-managers are able to negotiate favourable fees from asset managers due to the size of the investments placed which, in many instances, can result in an effective reduction in total cost to the investor.

Exchange-traded fund (ETF)

ETFs are listed investment products that track the performance of a ‘basket’ of shares, bonds or commodities otherwise known as indices. The JSE Top 40 is an example of an index. ETFs can be bought and sold in the same way as an ordinary share and are designed to enable investors to invest in a variety of assets classes by way of a single listed investment product. ETFs are ideal for those who are new to the world of investing.

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Craig Torr

Crue Invest (Pty) Ltd


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