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Important things to know about endowments

Endowments not only offer tax benefits but help investors save with discipline.

Endowments offer tax benefits to investors with a marginal tax rate of more than 30%, as it will reduce the tax payable on your investment growth. It also helps you to save with discipline, as you have a minimum investment period of at least five years.

What is the basic structure of an endowment?

  • It has a restricted investment term of a minimum of five years;
  • Allows you to make a lump-sum investment or recurring contributions;
  • The investment is taxable in the hand of the investment life company; and
  • Depending on the platform you invested on you can choose to invest in a combination of unit trusts and can switch freely between these at any point during the investment period.

What are the benefits of investing in an endowment?

  • Endowments are taxable in the hands of the investment life company and taxable at a rate of 30%;
  • If your marginal income tax rate is higher than 30%, you can benefit from tax savings in an endowment;
  • These investments can be used for estate planning purposes as they are payable to your nominated beneficiaries on death; and
  • The first five years is the restricted term but after that, you may withdraw from your investment at any time, or schedule regular withdrawals with no tax implication.

Can I withdraw from my investment if I need it?

You may only withdraw money once during a restriction period but could be subject to penalties. The restricted period can be extended as per the 120% rule. When you are no longer in the restriction period, you may withdraw any amount, at any time. You may also set up a regular monthly withdrawal.

What is the 120% rule? 

Your five-year restriction period may be extended if you invest more over one year than 120% of your investments over either of the past two years.

Why are endowments beneficial for estate planning purposes?

Endowments allow you to nominate beneficiaries which means on your death the money invested will be payable directly to the beneficiaries and they are not required to wait for the estate to be wound up. You can also nominate a beneficiary for ownership to inherit the investment and become the new policyholder if you die. No executor’s fees will be charged on the amount paid out, but it will form part of the estate for the calculation of estate duty.

What are the main differences between investing in an endowment vs a unit trust?

Liquidity:

  • Endowment: minimum investment term five years but after five years the funds are available to be withdrawn with no tax implications.
  • Unit trust: can withdraw at any stage.

Tax benefits:

  • Endowment: Yes, for individuals that have a marginal tax rate of higher than 30%.
  • Unit Trust: No tax benefits tax is triggered at the withdrawal stage from a unit trust.

Estate planning:

  • Endowment: You can nominate beneficiaries to immediately receive the money or to take ownership of the investment if you pass away.
  • Unit Trust: In a unit trust investment, your money will be paid into your estate.

Are there direct offshore endowments available?

Yes, there are offshore endowments available and they follow the same structure as a local endowment.

Upon your death, the investment will be paid to the nominated beneficiary or they can decide to take ownership. The beneficiary is not required to bring the funds back into South Africa but can get it paid into an offshore bank account as long as the account is in the name of the beneficiary.

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Michael Haldane

Global & Local Investment Advisors

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