Endowment policies are misunderstood

“Endowment products are misunderstood and mis-sold,” says Leon Campher, Association for Savings and Investment SA (Asisa) CEO.

“But under the correct circumstances they have a role to play in an investment portfolio.”

Old-style endowments often bundle a saving and insurance element in one policy.

They require at least a five-year lock-in and charge punitive penalties if the funds are accessed before maturity. Costs are poorly disclosed. “I recently did a calculation that showed a shocking 4% to 5% annual fee on a typical endowment.

“We were unable to get the information on fees from the in- vestment house, so we simply calculated the return on the underlying funds, and compared it to the growth of the client’s endowment,” says Amelia Morgenrood, a PSG Wealth certified financial planner.

New-generation endowments are pure savings vehicles, with a similar low-cost structure to that of a direct investment like a unit trust.

“For some investors these can make worthwhile investments,” adds Busi Lekuba, a financial planner with Masthead Financial Planning.

Investing in unit trusts or endowment funds comes down to tax treatment, she says.

Endowment funds are often sold to investors as tax-free investment vehicles – which is wrong. The product may seem tax-free because endowment policies aren’t taxed in the hands of the investor upon maturity, but inside the policy at a flat rate of 31%.

The flat tax rate of 31%, however, could make endowments a useful vehicle for high-income earners paying a marginal rate of 45%, says Lekuba.

Endowments also have benefits.

Importantly, an endowment is a long-term investment vehicle by nature, with a five-year minimum maturity period.

It’s possible to access some funds before maturity in the event of an emergency, says Campher, but there are restrictions.

Endowments are a useful investment vehicle but they will not work for everyone, is Lekuba’s opinion. estate-planning