Ideal saving for the medium term
Endowments are policy contracts which commit you to a minimum investment period of 5 years after which the proceeds are tax free. They are ideal vehicles for saving towards children’s education, holidays and deposits for a car or a house.

Not included in your tax return
An endowment basically provides a “wrapper” around various funds of choice (mainly unit trusts) which may be invested across various asset classes such as, shares, property, bonds and cash. The returns from these funds are taxed inside the endowment and paid to SARS by the service provider at a flat rate of 30%.

Capital Gains are taxed
If and when you decide to take the proceeds of the endowment you trigger capital gains tax which is dealt with inside the wrapper.
During and after the 5 year period you can switch between funds and this also leads to a tax on any capital gain. The effective rate of capital gains tax is 12%. Again, this is paid to SARS by the service provider and is not included in your tax return.

Pays outside your estate
In the event of death the proceeds of an endowment will be paid to a nominated beneficiary.This avoids executor fees (3,5% plus VAT) which charged on assets inside your estate.

Not for everyone
The tax applied to endowments benefits you if your marginal rate is above 30%. You will get a better return investing directly in the same unit trusts if your tax rate is lower. You also can use your exemptions on interest and capital gains which are not applied inside the endowment

An endowment offers attractive benefits as a savings vehicle which should be compared with other options to optimise your investment portfolio.

There is value

The recent tax free savings account (TFSA) presents value for everyone by escaping the taxes which are levied on interest, rental income and capital gains tax. Depending on the funds that you invest in, this could reduce the return by a few percentage points. This makes a big difference in the compounding over time. So, there is a distinct value proposition found here.

Fees still apply                                            Don’t ignore the fees as they still apply. You will pay fees to the administrator, the fund manager and the financial advisor if you use one. You can go it alone and invest directly but then do your home work.

Depending on the funds chosen for the investment the collective fee could be as high as 2%. So, if the fund performs at 10% the actual return which will be 8%. If tax was applied this would be further reduced. This which is where the real value of the TFSA is found.

The limits

You can invest a maximum of R36 000 per annum (R3000 per month) with a maximum life time contribution of R500 000 which will take around around 13 years to reach. The ceiling will hopefully be adjusted over time to compensate for inflation as there is no provision for automatic inflation increases if you take up the maximum annual allowance.

If you withdraw you will not be credited with the contribution against your overall lifetime limit when you invest again. For example, you contributed R100 000 over a few year and decided to withdraw R50 000. Your lifetime limit will still remain at R400 000.

The same investment principles apply

The investment is liquid, meaning that you can withdraw at any time. You should be careful, however, if you have a short term view. In which case, more cautious funds should be considered as opposed to funds invested in equities which need time to smooth out the risk of loosing capital.

You can invest online but do your homework and understand the T’s and C’s before signing up. Understand the funds and the relative costs along with the mechanics of investing and withdrawing.

Tax savings are a huge advantage

In a highly taxed environment such as ours, any tax break on investments should be taken advantage of to improve your savings over time. Compared to endowments which are taxed at 30% on all returns the tax free savings account are the first port of call. A must for everyone.