SENSIBLE BENEFITS
ENDOWMENTS ARE OFTEN OVERLOOKED
Income and capital gains tax benefits which you may be able to utilize. By Bryce Wild, Private Wealth Manager- NFB East London.
S
ince I entered the financial services industry in 2012, I have noticed the trend of many individuals automatically investing discretionary funds into unit trusts, without taking the time to consider any other options or without having received proper guidance in this regard from financial advisors. While I agree that making use of a unit trust is a good investment decision when looking to diversify one ' s portfolio, it is important that individuals consider whether investing in a unit trust is the best option in their particular circumstance, or whether making use of an endowment would be more beneficial.
Even though the above are compelling reasons to make use of an endowment policy for discretionary funds, there are a couple of limitations that investing in an endowment introduces:
= A five year restriction period applies, during which only one loan and one surrender from the policy is allowed.
= Individuals can only invest 120 % of the higher amount invested in each of the past 2 years. If this rule isn ' t adhered to, the 5 year restriction period starts again.
Benefits of Investing in an Endowment:
= Income Tax: within endowments, income tax is levied on individuals at a tax rate of 30 %. Within unit trusts, the individual ' s marginal tax rate will be applied and this may be anything up to the maximum marginal tax rate of 41 %.
= Capital Gains Tax: the maximum effective capital gains tax rate within an endowment structure comes to 12 %, whereas it is 16.4 % for unit trusts and other discretionary investments held outside of an endowment structure.
= Administration Efficiency: an endowment is taxed in the insurer ' s hands, which means that the investor does not have to go through the hassle of submitting a tax return for the endowment each year.
= Executors Fees: no executors fees are payable upon death if a beneficiary has been nominated on the endowment policy.
A unit trust does, however, have the advantage of having more flexibility when compared to an endowment. I say this because an investor is able to add funds to the investment at any time and they don ' t have to worry about a 5 year restriction period applying.
If one takes all of the abovementioned information into account, it is clear that individuals with a marginal tax rate of greater than 30 % are more often than not better served by making use of an endowment( mainly due to the income and capital gains tax benefits).
However, which investment vehicle to make use of is not always a straightforward decision and this is why it is important to consult a qualified financial advisor before making the final decision. If you need assistance in this regard, please contact an NFB Private Wealth Manager at one of the following offices: East London 043-735 2000 = Port Elizabeth 041-582 3990 Cape Town 021-202 0001 = Johannesburg 011-895 8000
22 sensible finance Mar17