I wish to create a legacy for my grandchildren.
31 Aug 2022 00:20
I am a 77-year-old widower and inherited R800 000 from my late husband’s living annuity. I do not need those funds for daily or emergency needs, but I would like to put them away for a five-year period or longer. Would an endowment be the best investment instrument even though my tax rate is well below 30%? Is there a better investment that matches my risks? I wish to create a legacy for my grandchildren.
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
- 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.
- An endowment structure will save R32 200 on executor’s fees.
- 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!
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