If you have an income tax rate that is higher than 30%, an endowment fund could work out to be beneficial for you as there are tax benefits within the endowment if your tax rate is higher than 30%.
The other area that an endowment will help is in estate planning, as you can nominate beneficiaries to an endowment and in the event of your death the funds will be paid out to the beneficiary straight away, without it being caught up in the wounding up of the estate. The value of the endowment will still be included in your estate for the calculation of estate duty, but the endowment policy allows your estate to save on executor’s fees.
How is your investment taxed?
With regards to any investment return, both the interest and capital growth would be included in your taxable income and taxed at your marginal income tax rate. With regards to an endowment, the investment returns are taxed at a fixed 30% for an individual, hence the endowment being a tax haven for individuals being taxed above 30%.
How do you Invest in endowments?
With an endowment policy you have two options, either through a lump sum amount or by a monthly debit order.
Once you start with an endowment there is an investment period (5 years, 10, years or 15 years) where you may only take one withdrawal from the policy. If you surrender the policy before the end of the term, you could face serious penalties on the policy.
The other negative is the amount you may contribute each year is restricted to the amount you contributed the year before. If you increase the contribution, you may extend the term of the policy by a further 5 years.
Endowments are not the most popular investment products on the market, however I believe that they still have their place, if you have a disciplined investment philosophy.
All Video Clips and Pictures supplied by Allan Gray
September 3, 2014
Grant van Zyl