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The tax benefits of endowment policies

Endowments offer an attractive tax-efficient option for people who want to save more than the maximum annual limit for tax-free savings accounts, and those who have exhausted their annual tax allowances such as tax-free interest income.

The recent increase in the CGT inclusion rate means:

  • an 18% effective tax rate on capital gains for individuals in the highest income tax bracket, and 36% for trusts,
  • for an endowment policy, the effective CGT rate for these individuals and trusts is just 12%.

In addition, tax on income is 30% for endowments as opposed to 45% when these individuals are taxed according to their marginal tax rates in other investment vehicles. This tax treatment is also beneficial for other income categories as well (i.e. for everyone with a marginal tax rate above 30%).

In addition to tax savings, an endowment offers the following advantages:

  • Simplified tax administration as tax is recovered within the endowment and taken care of on behalf of the investor.
  • Insolvency protection – the entire value of the policy will be protected against creditors three years after inception until five years after the maturity, or termination of the policy.
  • Beneficiary nomination can lead to potential savings on executor’s fees (up to 3.99% of fund value). Where a beneficiary has been nominated, payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly.
  • Liquidity is created in the estate as payment of the death benefit does not depend on the winding up of the estate and beneficiaries will receive the proceeds relatively quickly.

Advantages of staying invested in an endowment, even after maturity

  • You will not pay any tax on future policy proceeds; Sanlam will pay the tax on your behalf from its policyholder’s fund.
  • Access to the money: After the maturity date, you have access to the investment funds through lump sum or regular withdrawals. These withdrawals will also be tax free.
  • Insolvency protection – the entire value of the policy will be protected against creditors five years after the maturity, or termination of the policy

There are a couple of options available to you after maturity so you can continue to enjoy the benefits of your endowment. At maturity, you have the following options:

  • With your accumulated savings, you can continue growing your money by remaining invested in your endowment policy where your full or some of your maturity proceeds can continue growing (depending on how much you withdraw at that point).
  • If you are paying premiums, you also have the option to continue paying your current premiums or to contribute a higher amount.
Sanlam Life Insurance is a licensed financial service provider.
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