Apart from estate planning benefits, the latest budget changes further strengthen the tax benefits of the endowment, which is encouraging investors to revisit the case for this often overlooked product.
To build a successful long-term investment portfolio, one must consider ways to enhance their capital whilst finding efficient mechanisms to reduce your taxes. Endowments remain a useful investment vehicle and offer a disciplined way of saving where you are committed for a certain period so that you can reach your goals. The tax benefits of endowment policies Endowments offer an attractive tax-efficient option for people who want to save more than the maximum annual limit for tax-free savings accounts, and those who have exhausted their annual tax allowances such as tax-free interest income. The recent increase in the CGT inclusion rate means: an 18% effective tax rate on capital gains for individuals in the highest income tax bracket, and 36% for trusts, for an endowment policy, the effective CGT rate for these individuals and trusts is just 12%. In addition, tax on income is 30% for endowments as opposed to 45% when these individuals are taxed according to their marginal tax rates in other investment vehicles. This tax treatment is also beneficial for other income categories as well (i.e. for everyone with a marginal tax rate above 30%). In addition to tax savings, an endowment offers the following advantages: Simplified tax administration as tax is recovered within the endowment and taken care of on behalf of the investor. Insolvency protection – the entire value of the policy will be protected against creditors three years after inception until five years after the maturity, or termination of the policy. Beneficiary nomination can lead to potential savings on executor’s fees (up to 3.99% of fund value). Where a beneficiary has been nominated, payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly. Liquidity is created in the estate as payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly. Advantages of staying invested in an endowment, even after maturity
Source: Sanlam
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