An endowment is a type of investment plan that can hold a variety of underlying investment options, including unit trusts and a share portfolio. It requires an investor to invest for a minimum period of five years. It provides investors with full access to their money after five years or when the policyholder dies. In South Africa, endowment plans are taxed at reduced rates (compared to the typical tax rate of an individual in the highest income tax brackets). When you do decide to withdraw your money, you won’t have to pay any further tax on your investment.
There are two main considerations around endowments: tax and estate planning benefits. Income received in an endowment is taxed at a flat rate of 30% for individuals and trusts, while capital gains is taxed at 12%. 20% dividend withholding tax also applies. Tax on returns is deducted and administered by the product provider. The Long-term Insurance Act that regulates endowments imposes a few restrictions: During the first five years of your investment, known as the restriction period, you may only make one withdrawal. The maximum withdrawal during this period is limited to the amount invested plus interest at 5%. The balance may be withdrawn after five years However, when you are not in a restriction period, you may withdraw from your investment at any time, or schedule regular withdrawals. 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. Most life insurance companies and investment platforms offer endowments. In the event of your death, your beneficiaries can receive your investment immediately and there are no executor's fees. This amounts to a saving of up to 3.99% of fund value. Tax administration is taken care of on your behalf (the insurance company calculates, deducts and pays the taxman). The entire value of the endowment will be protected against creditors after three years. This protection will continue until five years after the termination of the endowment. You are not restricted to maximum levels of equities and offshore investments, as in the case of retirement annuity. You can also use an endowment to draw income upon retirement, as long as the five-year restricted period has passed. You can do this on an ad-hoc basis, without being forced to draw income at specific intervals. Return profile: It will depend on the type of unit trust you invest in. If your underlying investments are income unit trusts, you may expect a net annualised return of 4% after fees and tax. If your underlying investments are high growth unit trusts, you may expect a net annualised return of 6.5% to 9% after fees and tax. Who is it suitable for:
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