Endowments: The underdog of the investment world can help you make money
Endowments aren’t something you hear much about these days.
That’s because they aren’t the most popular choice of financial advisors anymore. They prefer unit trusts, retirement annuities and insurance policies because they earn more money on them.
But endowments are great. They’re investments ‘disguised’ as an ‘insurance policy’ and are classified as a type of life insurance that’s payable to you even if you’re still living, on the policy's maturity date, or to a beneficiary when you die. And you get to decide which investment fund your premiums are invested into.
And the best part about this secret weapon is it enables you to save as much as 30% of the tax you normally pay if you use traditional investments.
Let’s say you have an income of R50,000 per year coming from your investments like a unit trust, stocks and property
If you’re taxed 40% in your personal capacity you’ll pay R20,000 in taxes. But if this R50,000 income was generated in an endowment policy, you’d pay just R14,000 in taxes (28% tax paid by the endowment policy administrator before you receive your cash). That’s a saving of R6,000 – or 30% – of the taxes you’d normally pay!
So you can see how a tax efficient investment like this helps you legally pay less tax.
To sign up for an endowment policy, approach a company like Old Mutual, Fairbairn Capital (an Old Mutual subsidiary) or Sanlam.
Take Fairbairn Capital’s Investment Frontiers Capital Portfolio for example. This investment vehicle, gives you the tax efficiency of an endowment policy and the capital growth the stock market delivers through an investment fund of your choice.
This endowment policy has a minimum monthly ‘investment’ of R5,000 or a lump sum of R100,000.
Remember: If your average tax rate is lower than 28% (in other words, you earn less than R660,000 income per year) don’t use an endowment policy – there’s no tax incentive.