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Overlooked endowments have tax, estate planning benefits

Lower costs, increased investment options and better transparency have addressed previous scepticism.

Endowments are often overlooked when it comes to portfolio planning, but they offer many benefits to investors.

Endowments are investment ‘wrappers’ around underlying investments in equities, property, bonds and cash that offer tax and estate planning benefits, especially to people in a 30%-plus tax bracket.

Originally considered expensive, inflexible and opaque, decreases in cost, increased investment options and better transparency make endowments a good option for tax-efficient discretionary savings.

Roenica Tyson, investment product manager at Glacier by Sanlam, says there have been some misconceptions based on the history of endowment wrappers. “These myths have, however, been dispelled if you look at how they are currently positioned, with flexibility and investment choice.

“If one looks at the discretionary savings space, where there are a lot more taxpayers in the 30%-plus marginal tax bracket, using an endowment as a tax-wrapper makes sense,” she adds. “Given the amount of savings in that space, it’s clear that too many investors are missing out on the benefits endowments can provide.”

Tyson says endowments offer investors flexibility and a wide range of investment options structured around specific investment needs and risk profiles, with returns linked to investment choices. Glacier offers locally-focused endowments, which include options that offer protection, as well as the Global Life Plan, an offshore endowment which is directly invested in foreign shares and funds, offering a wider investment universe and foreign currency investments.

In terms of flexibility, there is no restriction on maximum levels of equities and offshore investments as in local retirement savings products. Endowments require a five-year investment commitment, but investors can access their funds during this period. At Glacier there are no fees charged for this access.

After the five-year period, investors can draw income as needed without being restricted to drawdowns at specific intervals.

If investors are looking for longer-term growth, investing in growth assets such as equity and property is the only way to earn real growth. That is where the five-year horizon of the endowment is advantageous.

Tyson says if one looks at tax trends for individuals over the last seven or so years, the top marginal rate increased from 40% to 41% and then 45%, while capital gains inclusion rates also moved up steeply during this period. Endowments, however, are still taxed at a flat rate of 30%, with an effective tax on capital gains of 12%, allowing scope for significant savings for individuals in higher tax brackets.

Tyson recommends the optimising of tax across all discretionary investments, starting with tax-free savings and a portion of savings in an investment plan where annual interest and capital gains exemptions can be used. “Once you have maximised all of those and are in a 30% tax bracket, consider an endowment for additional savings.”

Estate planning, which is key for investors, is also often underestimated, she says. Endowments allow for the nomination of beneficiaries on the policy, so money is immediately passed on to beneficiaries and this is not dependent on winding up an estate. This is important for liquidity and a potential saving by avoiding executor fees, which can be up to 4% of the fund value.

“Another benefit is insolvency protection,” she says. “After three years, provided certain criteria are met, there is protection against creditors on the entire value of the endowment.”

Endowments are also easy from a tax administration point of view. Tax is recovered within the policy on behalf of the investor and paid to Sars, so there is no administration responsibility sitting with the investor – and no additional charge for this being handled on their behalf.

Tyson says one of the biggest investment problems South Africans have is uncertainty, causing many to want to retreat and opt for cash. But cash is not a superior investment choice. And investing via an endowment provides the opportunity to grow wealth well in excess of inflation over the long term, while saving tax.

A qualified financial advisor can assist investors to ensure their portfolios are constructed in line with their personal goals and risk profile.

Summary of the key benefits of endowments:

  • Tax-efficient
  • Estate planning advantages
  • Transparency and flexibility
  • Insolvency protection
  • Access to funds

Brought to you by Glacier by Sanlam.

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Also overlooked is that there is cgt on withdrawals.

Not worth the effort. It’s a dis incentive to save.

Not true. CGT is taxed inside the fund. Individual has no CGT liability in own hands.

That is what I too thought. If its in a wrapper it is taxed at source. That is until I made some withdrawals – and I was taxed. I therefore have done the research – and that is what I found out to my utter horror.

The policy growth is taxed at 30 % in terms of the 4 Funds approach – and then withdrawals attract cgt tax.

Do the research – unfortunately its true!

Many policy holders are being taxed.

So what is the problem.

One pays CGTax and always had to pay it.

Only question is was the rate at the lower Endowment rate or personal rate?

There is no CGT on withdrawals. It is all taxed within the product. There could be penalties and/or taxes if you exceed the allowed 1 withdrawal and 1 interest free loan within the 5 year restricted period, though. But, there are ways to increase your liquidity while still utilising endowments.

The sad reality is that these products are mostly sold in the form of, for instance, “study policies” to lower income earners for whom very of of the listed benefits apply. Add to this the restrictions applicable in the first five years, and it is difficult to motivate the sales of these products to the lower end of the market, rather than unit trust investments. Then there is of course the matter of costs, with both the fees charged by the product provider and commission being substantially higher. Often, the term is extended to ten years and beyond, which means substantially higher commission, resulting in higher early termination penalties. These do not apply to unit trust investments, which offer the same and more diverse portfolio options.

Advice should super cede recommendation of product; which in a 100% client-centric (& fiduciary advised) world should deliver a robust, personalised outcome to deliver to the client’s need and objective. The product offerings, albeit an endowment, unit trust, structured product etc are merely a means by which to implement the most appropriate advice. The arguments used so far show possible biases (self-serving or not) which limit a clients objectivity in making an informed decision. Views expressed may also allude to an avoidance of life assurers, (as the endowment was borne from these entities), but today there is enough competition and providers (& regulatory change) to reconsider endowments as an appropriate offering.

Who decides what the endowment / wrapper invests in? Can the funder direct all in just say 5 direct equities selected by the funder?

If a manager decides – forget it

You choose. You can setup a PSP (personal share portfolio) within an endowment and hold 1 share if you like.

Only some of the platforms allow for PSP – Glacier, Momentum and OMW (I think).

You can also do an asset swap with an endowment.

all these things do add additional layers of cost.

Sorry, only saw this now. Thanks Charles.

If I can park funds in an endowment and direct where the funds are invested and have no tax consequence over themlife of it, it might be interesting. If the fund is paying tax every year, then pretty pointless

I distrust everything called “Sanlam” and “Glacier”. Once bitten….

When I retired my then new Financial Advisor recommended Sanlam Cumulus besides my Living Annuity. All the so called benefits eg 5% , 3%, 1% addition from time of Investment for every Addhoc rands added was eroded with hi fees and Hi Tax deducted. I and many of us were also told that tax is paid to SARS but after 5 years on the Endowement no more tax is paid. New advisor we pulled the investment.

I have a pension Living Annuity with Sygnia (brilliant) and large amount of cash invested between my wife and myself and use the max each of R34500.00 allowable with Sasfin and once a year remve the Interest and stick both into our Tax free Savings Account also with Sasfin. Tired of hearing cash is going no where. We sleep well at night and enjoying our Retiremeny.
Wally Stowe

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