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The Tax Advantages of an Endowment.

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.

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

  • You will not pay any tax on future policy proceeds; Your chosen fund house will pay the tax on your behalf from its policyholder’s fund.
  • Access to the money: After the maturity date, you have access to the investment funds through lump sum or regular withdrawals. These withdrawals will also be tax free.
  • Insolvency protection – the entire value of the policy will be protected against creditors five years after the maturity, or termination of the policy.

There are a couple of options available to you after maturity so you can continue to enjoy the benefits of your endowment. At maturity, you have the following options:

  • With your accumulated savings, you can continue growing your money by remaining invested in your endowment policy where your full or some of your maturity proceeds can continue growing (depending on how much you withdraw at that point).
  • If you are paying premiums, you also have the option to continue paying your current premiums or to contribute a higher amount.

It horses for courses when choosing an endowment. The main advantage is the tax benefits which tend to benefit the higher taxpayers.

Source: Sanlam

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