Weekend Argus (Saturday Edition) - - PERSONAL FINANCE -

If you have trou­ble be­ing a dis­ci­plined saver, you could con­sider a life as­sur­ance en­dow­ment (in­vest­ment) pol­icy, where you are obliged to save and pre­serve your sav­ings for at least five years.

These in­vest­ments are gov­erned by the Long Term In­surance Act.

The min­i­mum in­vest­ment term is five years. If you com­mit to pay­ing a monthly pre­mium and then find you can­not meet the monthly pay­ments, the life as­surer can im­pose penal­ties.

You can cede a pol­icy out­right as se­cu­rity for a loan or as col­lat­eral.

You can and should nom­i­nate a ben­e­fi­ciary on an en­dow­ment pol­icy. Ger­rit Viljoen says that no ex­ecu­tor’s fees are payable on en­dow­ments if you nom­i­nate a ben­e­fi­ciary.

If you do not nom­i­nate a ben­e­fi­ciary, the money is paid into your es­tate where it does at­tract ex­ecu­tor’s fees. Ex­ecu­tor’s fees are paid to the ex­ecu­tor of your es­tate and are a max­i­mum of 3.5 per­cent plus VAT, which amounts to 3.99 per­cent of your gross es­tate, and six per­cent of any in­come col­lected af­ter you die. You can ne­go­ti­ate ex­ecu­tor’s fees when you draw up your will.

Es­tate duty is payable on the ben­e­fits of an en­dow­ment pol­icy. The ex­ecu­tor of your es­tate must cal­cu­late the net value of your es­tate af­ter ac­count­ing for all the de­duc­tions and ex­emp­tions al­lowed by the South African Rev­enue Ser­vice. The first R3.5 mil­lion of the as­sets in your es­tate is ex­empt from es­tate duty. Es­tate duty is then cal­cu­lated at a rate of 20 per­cent of the net value of your es­tate.

Viljoen says en­dow­ment poli­cies can be tax-ef­fec­tive if you fall into a high tax bracket. The rea­son is that the in­ter­est, net rental in­come and for­eign div­i­dends are taxed at a rate of 30 per­cent in the hands of the as­sur­ance com­pany.

This works in your favour if you fall into higher mar­ginal tax brack­ets above 30 per­cent and have used up your in­ter­est ex­emp­tions, he says.

The cap­i­tal gains earned by an en­dow­ment fund are sub­ject to cap­i­tal gains tax (CGT), again in the hands of the life as­sur­ance com­pany. No ex­clu­sions ap­ply.

Be­cause both in­come tax and CGT has been paid by the as­sur­ance com­pany, you do not have to pay any fur­ther tax when you are paid out.

You are al­lowed only one with­drawal and one loan dur­ing the first five years of the pol­icy, af­ter which you can make with­drawals.

In the first five years any with­drawal will be sub­ject to early with­drawal penal­ties by the life as­surer.

Risk ben­e­fits, such as life and dis­abil­ity cover, can be added to the pol­icy.

You make ei­ther monthly con­tri­bu­tions or in­vest a lump sum.

The an­nual pre­mium you pay can be in­creased, but not by more than 20 per­cent a year.

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