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The role of endowments

For flexibility and optionality in terms of properly diversifying offshore, one needs to know the capacity and the rules: Roenica Tyson – investment product manager at Glacier by Sanlam.

SIMON BROWN: I’m chatting now with Roenica Tyson, investment product manager at Glacier by Sanlam. Roenica, I appreciate the early morning. Endowments, which used to have a bad rap back in the sort of eighties and nineties, are kind of reinventing themselves, and certainly have a place within financial planning. Two key components – tax efficiency and perhaps an important point is unlimited exposure.

Initially, if my understanding is correct, there is tax within an endowment product, but certainly if you’re in one of those higher tax brackets, the 40%, 45%, you can get some significant tax benefit via an endowment.

ROENICA TYSON: Absolutely. Good morning, Simon. I think to put it in perspective those high tax brackets, like you say, go up to 45%. So within the endowment the tax rate that applies for individuals is 30% of income, and effectively for capital gains that’s 12%. So there is for those higher-rate taxpayers a big saving.

The additional benefit also – and I think it’s very relevant with us coming out of the tax filing season now – is that the provider of the endowment will recover that tax and pay direct to Sars. So there’s one less thing for us to worry about in the tax return in terms of budgeting the cash flows to be able to pay that tax.

SIMON BROWN: I take your point on that. It’s kind of if someone else does the paperwork it’s simpler for me. In a Regulation 28 world, where many of us are going to have those Reg 28 products, an endowment doesn’t have restrictions, certainly in terms of local versus offshore, or those asset classes. That gives an investor a lot more flexibility.

ROENICA TYSON: Definitely, Simon. I think it’s worth making the distinction between offshore endowments and also local endowments. If you look at offshore endowments, those are typically domiciled offshore, and that’s where investors have to externalise their assets, so there you have to use their own foreign allowance to get their rands offshore. And then they’re able to invest that in that whole broad universe of offshore funds and ETFs and shares and/or in foreign currency. There’s a restriction on how much money you can get out of SA essentially to invest.

If we look at local investments, though – and these are typically the rand-based ones – there are some restrictions on offshore, but I think the distinction between endowments and, like you say, the retirement annuities, for example, is key. With a retirement annuity, each investor has to comply with the offshore limit, whereas with the endowment that’s only monitored on an aggregate level. So as long as the total endowment that the provider offers is within the offshore limit, being 40%, then that’s okay.

I think that’s where it’s important to understand what capacity is available with the provider, and what rules they are putting in place to manage this. Just as an example, at Glacier we’ve been fortunate that we’ve been able to manage this and we haven’t had to place restrictions on any individual investors in terms of how much they’ve put offshore. I think it’s a key consideration, if you want that flexibility and optionality in terms of properly diversifying offshore, to just know what the capacity is and [what] the rules are.

SIMON BROWN: Got that. I remember earlier in the year one of the endowment providers was actually having to place restrictions on the offshore.

A last quick question. There are also benefits around estate planning in that, in the event of a passing, it pays directly; so there is no executor’s fee and that can certainly save a good number of percentage points, and it can pay out a lot quicker. It doesn’t need the estate to be wrapped up. Two small but significant benefits.

ROENICA TYSON: Absolutely. I think executors’ fees are up to 4%. That can be a significant and worthwhile saving. And then I think also without having to wait for an estate to be wound up first, for loved ones and dependants to be able more quickly address their needs, I think interest is a key concern for many investors when looking at their estate planning.

SIMON BROWN: We’ll leave it there. Roenica Tyson, investment product manager at Glacier by Sanlam, I appreciate the early morning.

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