The use of endowments in financial planning

By: Fareeya Adam, head of retail product solutions at Momentum Investments

Fareeya Adam, head of retail product solutions at Momentum Investments
Fareeya Adam, head of retail product solutions at Momentum Investments

An endowment is a life insurance product that is usually used as an investment vehicle in financial planning because of its potential tax and estate planning benefits.

While it seems that endowments tend to be used less frequently these days in favour of other available investment wrapper types, they remain an important part of a financial adviser’s tool kit when doing investment planning.

The proceeds from an endowment is paid net of tax. It is also paid directly to nominated beneficiaries when the insured person passes on, so the proceeds do not form part of the deceased estate for the purpose of executor fees.

To enable continuity, an endowment policy can be structured to continue even if the client passes on. This can be achieved by using a sinking fund type policy, which doesn’t have any insured persons. Alternatively, the client can specify additional insured persons if there is a need for the policy to continue.

However, endowments are not suitable for all clients, so it is important to understand which client profiles typically benefit from endowment structures. High-income earners could benefit from the tax efficiency of endowments by using them as part of their personal financial plans. These clients could pay up to 45% tax on interest earned on their local investments, and capital gains tax of up to an effective rate of 18%. When using an endowment, these rates effectively reduce to 30% and 12%. In both instances, dividend withholding tax of 20% applies.

Time horizon: The potential tax benefit is often weighed against the restrictions that apply to an endowment. An endowment has a prescribed minimum term of five years. During any restriction period, a client can make one loan and one withdrawal. Any withdrawal is limited to a maximum of contributions plus 5%. An endowment might, therefore, not be suitable for a client who needs regular access to their money.

Tax efficiency: Endowments are taxed at a rate of 30%, so for clients with marginal tax rates higher than this, there will be a tax benefit. For clients with a tax rate lower than 30%, it could be a less suitable option. There are no limits to how much a client can invest in a local endowment. High net worth individuals are therefore not restricted in terms of the extent of the tax benefit.

Offshore endowments are another important tool in the advice process. Clients can combine the potential benefits of tax efficiency with hard currency investment options to meet their offshore investing needs.

An endowment on its own cannot deliver on an investment outcome. It must be combined with best of class investment components that can power the growth for successful achievement of clients’ goals.

Momentum Investments offers both local and offshore endowments. Financial advisers can choose from the broadest available suite of local and global investment components and instruments to build personalised investment portfolios for their clients. From basic unit trusts and personalised model portfolios to exchange-traded funds, direct shares and personal share portfolios, as well as other specialised investment products like guaranteed endowments.  

We understand that people have different needs and that their dreams and aspirations are unique. Our range of investment solutions caters for everyone and allows you to partner with investment specialists and manage outcomes optimally in the context of the strategy most suitable for your clients. That’s why with us, investing is personal.

Speak to your Momentum consultant for more information about how we can help you with your clients’ personal investment needs.

Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services and registered credit provider (FSP 6406)

Visit the official COVID-19 government website to stay informed: sacoronavirus.co.za