Endowments Explained

When OUTvest was conceptualised, we had a view that we were going to build a platform which went far beyond goals-based savings. We wanted to provide a set of tools that would empower our clients to reach financial independence.

As we have established ourselves in the market and been able to deliver on this objective for our clients, we have begun to focus on extending our product suite and our latest offering is an endowment, known as the Fixed OUTcome Endowment. 

But what is an endowment, how do they work and why should you care?

As you mature as an investor, you have three main considerations which should come into your decision-making process: 

  • ·      Your investment return
  • ·       Tax
  • ·       Estate planning

An endowment product is a structured product for investors who are happy to lock up their money for at least 5 years, possibly in a tax efficient structure and – in the event of death – an efficient way of transferring wealth through their estate.

Your investment return

An endowment can hold a variety of different assets including unit trusts, Exchange Traded Funds (ETFs) and structured share portfolios. For the Fixed OUTcome Endowment, we make use of a Fixed Deposit instrument – where the investors return is in the form of a secured interest rate.  

One of the important differences between an endowment and a typical investment is that the client does not directly own the underlying investments. Instead the underlying investment is owned by the life insurance company and the client has a claim on the proceeds from the investment through the investment policy. It is for this reason that tax on interest income, dividends, or capital gains is paid by the Life insurance Company and not the end investor.

In a linked endowment the return to the investor is based on the performance of the underlying investment, whether that be a Fixed Deposit, an ETF or a listed share. The insurer does not guarantee the return in any way. 

Tax

As a high-income earner, your tax structuring becomes a key consideration. It makes no sense to generate an income and then find you are giving a large proportion back in the form of tax.

The after tax rate for an endowment that invests in a fixed deposit will be most attractive to those individuals who plan to, or who have already invested more than R400 000* in interest bearing investments, such as Fixed Deposits, Money Markets, Bank Accounts, and of course, the Fixed OUTcome Endowment. This is particularly relevant for those who pay the top marginal tax rate (currently 45%).

Typically, if an endowment invests in a fixed deposit the interest rates are quoted as after tax rates. These could look lower than rates typically quoted for a Fixed Deposit or similar investment. The reason is that Fixed Deposit rates are always quoted before tax. This means it can be difficult to compare interest rates from an endowment with those from a Fixed Deposit.

To help you compare these rates, we have built our own pre-tax calculator that can help you work out the equivalent pre-tax rate you would need to compare the rate earned from the Fixed OUTcome Endowment to a Fixed Deposit. The interest rate from the Fixed OUTcome endowment is quoted as an after tax rate, whereas the rate from almost any other interest bearing investment is quoted before tax. You can access the calculator here

Estate planning

None of us like to consider our own mortality, but if you have ever been involved in settling a deceased estate, you will know that the process can be difficult and the costs of administering this can quickly grow.

We will cover this in more detail in a separate article, but one of the real benefits for those who invest in endowments is that nominated beneficiaries can be paid out quickly and you can save on executor’s fees, which could be as high as 4%.

We all want a Fixed OUTcome

As humans we all seek some certainty in life. We want to know that what we invest, will deliver the return we expect and that our saving habits and discipline will ultimately benefit our beneficiaries.

If the idea of a Fixed OUTcome for your investment appeals to you, please click here and let’s get you started on your investment journey.

 

*Assumed an investment of R400 000 at 6% per annum generates interest income of R23 800, which is the annual interest exemption for an individual under 65 for the 2019/2019 tax year.

 

OUTvest is an authorised FSP.  The OUTvest Fixed OUTcome Endowment is underwritten by OUTsurance Life Insurance Company.  This investment carries an element of risk and is not guaranteed by OUTsurance Life.  All figures used are for illustrative purposes only.

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