Is there a role for an endowment in my portfolio?

Feel free to reach out to PSG Wealth Manager Tanya Joubert directly.

Typical questions we, as wealth managers, ask our clients when doing this initial needs analysis and gathering information are:

• What is your envisaged investment horizon?
• Are you comfortable with the volatility sometimes associated with the stock exchange?
• Do you want flexibility in terms of additional contributions and withdrawals?

We often find that our clients have a need for simple administration when it comes to tax returns and/or estates.

This is one instance where endowments may play a valuable role. These products have earned somewhat of a bad reputation over the years, as they were not always explained properly, and historically, their cost structures were not extremely attractive.

New-generation endowment policies offered by linked investment service providers (LISPs) have a wide variety of funds from various product providers available. It is almost like a ‘supermarket of funds’ from which to choose funds that are best suited to your needs. Furthermore, the cost structures are incredibly competitive, simple, and transparent – unlike those of the old-generation policies.

I always tell my clients that there is no single product that will meet all requirements. It’s like a pair of scales – sometimes sacrificing something on one side is necessary to gain on the other side. For example, retirement annuities are tax friendly but don’t allow withdrawals, and several limitations apply to the underlying asset allocation.

Likewise, endowment policies are not one-size-fits-all products but are suitable for clients with specific needs that we will discuss below.

Especially since the Covid pandemic, some clients have been keen to reduce dependence on internal processes and turnaround times of the Master’s office.

Endowments allow investors to nominate beneficiaries with the capital being paid out immediately and directly to the beneficiaries on the investor’s death – unlike many other discretionary investments where the executor pays out the funds according to the will only once the administration of the estate has been finalised. What’s more, potential executor’s fees are saved in the process!

In addition, an endowment may reduce an investor’s tax liability where the investor pays a marginal tax rate of 30% or more. Growth within this product is taxed at a product level according to the 5-fund approach. It is not taxable in the investor’s hands. This means investors don’t have to take this product into account for their annual tax returns and they don’t receive any tax certificates either.

However, this product may not be suitable for investors who want access to funds in the first five years, as limitations are applicable to withdrawals within the first five years.

Do contact us if you want to discuss this product in more detail considering your unique needs, goals, and circumstances.