I’m 77 and inherited R800k; is an endowment a good investment option for me?

Dear reader,

Thanks a lot for writing to us.

I think it’s very important to understand that an endowment is an investment vehicle with a specific tax structure and estate implications. The investment vehicle itself isn’t responsible for the growth of the capital, but the funds you choose are.

Endowments are taxable in the hands of the investment life company and taxable at a rate of 30%. This investment vehicle can be used for estate planning purposes as you can nominate beneficiaries for ownership or proceeds in the event of your death. Your grandchildren can become the owners of the policy in the event of your death and proceed with the investment or the money can be paid out to them. The capital amount will form part of your estate and will therefore be subject to estate duty in the event of your estate having a value of more than R2 500 000. However, the policy will not attract executors’ fees (4.025%).

Below is a comparison between a flexible investment and an endowment:

Flexible investment

Tax on interest: Yes. Taxed at marginal tax rate.

Tax on dividends: Yes

Capital gains tax: Yes (maximum of 18%)

Executor’s fees: Yes

Estate dutiable: Yes

Period of investment: Open-ended

Withdrawals: Unrestricted.

Endowment

Tax on interest: Yes. Taxed at 30%.

Tax on dividends: Yes

Capital gains tax: Yes (maximum of 12%)

Executor’s fees: No

Estate dutiable: Yes

Period of investment: Five years

Withdrawals: Restricted. You may only withdraw money once during a restriction period.

Tax – endowment versus flexible investment

Flexible investment:

R800 000 capital investment

Growth @ 8%

Interest: R64 000

Interest exemption: R34 500

Taxable amount: R29 500

Tax @ 18%: R5 310

Endowment:

R800 000 capital investment

Growth: @ 8%

Interest: R64 000

Interest exemption: R34 500

Taxable amount: R29 500

Tax @ 30%: R8 850

In conclusion

1. An endowment is a good structure for estate purposes. You will pay a little bit more tax on the interest accrued if you choose an endowment structure.
2. An endowment structure will save R32 200 on executor’s fees.
3. The underlying investment funds provide the growth within the fund. Make sure you speak to an investment advisor who could help you choose the right funds.

Happy investing!