Modern endowments offer flexibility and are tax efficient

Waldette Stoffberg, Business Development Manager at Glacier by Sanlam

Waldette Stoffberg.JPG

Endowments of the past have been criticised widely. However, the modern endowment is much more flexible and is one of the most effective tax savings tools available today for discretionary monies.  Most investors are not aware of the benefits that an endowment can offer them as it is usually an option that is only considered when receiving advice from an accredited financial planner. 

Within the endowment policy all interest is taxed at a fixed rate of 30%. Realised capital gains are taxed at an effective rate of 12% and dividends at 20%. The endowment is especially beneficial for natural persons and trusts with a marginal tax rate of higher than 30% as it allows them to pay tax at a lower rate within the policy than in their personal names.  For example, a natural person who has a 45% tax rate can pay up to a third less tax on interest earnings and realised capital gains within an endowment policy.

Investment time horizon important

Even when a client has existing discretionary investments, an endowment can be a consideration. Individuals are allowed a R40 000 annual capital gains tax rebate.  This should be used annually and is an excellent opportunity to transfer some of your discretionary assets to an endowment at a lower tax rate, with the proper advice of course. 

One of the most important considerations when selecting an endowment policy is whether the investor can invest the money for a five-year term. Although access to the capital is possible within the first five years, it is important that the capital must be invested for a five-year term to fully utilise all the benefits of the endowment policy.

Endowments can be used in combination with other products

Remember, investment products today are not all or nothing. You can combine products. Most investments are structured with a short-, medium- and longer-term growth component. The longer-term component is usually structured with a five-year period in mind and the endowment policy is ideally suited for this component. Your short- and medium-term needs can then be structured into a product with an open investment term which is accessible at any time.

Nominate a beneficiary and save on executor fees

Other benefits of an endowment policy are that you can nominate a beneficiary and save executor fees at death. A nominee for ownership can also be added on the policy which means that if the original owner dies, the new owner can continue with the policy.  One of the less well-known benefits of an endowment policy is that if it has been in effect for at least three years, the value is 100% protected against creditors.

Target the out-performance of inflation

Over the past three years markets have been very volatile and we have seen an increase in investments in cash. This may be a short-term solution but will not target the out-performance of inflation over the longer term. Sanlam and Glacier have been able to ustilise the endowment policy structure to provide clients with solutions that will target the out-performance of inflation.  This includes Sanlam Cumulus that offers an 80% guarantee with a 5% additional upfront allocation as well as the Glacier Capital Enhancer that guarantees your clients’ capital with the possibility of an enhanced return of 75% over the five-year term.    

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Issue 83


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