The recent budget speech has proposed an increased taxation on high Income tax earners in South Africa. This amendment will naturally attract more of the nation’s wealthy to shorter termed investment vehicles such as endowments.
Money markets and fixed interest funds become less favorable to our wealthiest as they will now attract 45% income tax as opposed to 41%. The same goes for collective investment schemes, better known as Unit Trusts, which are taxed in the hands of the policy holder. Although very liquid , Unit Trusts are subject to the highest income tax bracket and Capital Gains tax.
The efficiency of the Endowment is that it is not taxed in the hands of the policy holder, allowing a more favourable rate of 30%. The effects of this can be seen in the table below.
Benefits of an Endowment
• Tax efficient for higher income tax earners as it is not taxed in their hands
• Tax free withdrawals
• No executors fees on death (3.99%)
• Beneficiary nominations
• A death benefit: your initial contribution is the minimum your beneficiaries will receive regardless of market conditions.
• Section 63 LTIA indicates protection against creditors after 3 years
This new legislation can have quite an impact on funds with high interest bearing amounts, so conservative to moderate portfolios can be more affected. We indicate this below by showing the difference in after-tax-return of an Endowment vs Unit Trust. Take note on how the moderate portfolio stands to pay more tax based on its higher cash proportions.
Using the tax rates implications from the above table, take a look at the after-tax-return for an individual policyholder fund on the maximum tax bracket.
Please note the table above is built on the assumptions of an individual policyholder on the maximum tax rate. The table does not include the effect of annual exemptions.