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.