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

(Source: Sanlam)