As an investor, you usually have one goal in mind: how to get the most from your investment. Many factors influence the return you get, including your time horizon, asset mix and the ability of the fund manager.
There is another aspect that casual investors often overlook and that is the vehicle in which your money is invested. For example, let’s see you invest R100 directly into a mutual fund and after one year you get a 10% return. If you cash it in, your R10 return is subject to tax at your marginal rate. If you are at the 45% rate, that means your 10% return is effectively only 5.5%. By not paying attention to the investment vehicle, you, as an investor, have lost almost half of the increase in your investment. Although this is an extreme example, when investing you need to consider the tax consequences.
For individuals who have large sums of money, such as an inheritance, and who are already at a marginal tax rate of 31% or more (i.e. anyone who earns more than R300,000 per year), an endowment such as Investec Access to the endowment becomes very attractive.
Endowment funds are vehicles in which you invest your money for a minimum period of five years. The advantage is that the maximum tax rate of 30% is applied and that the capital gains tax (CGT) is set at 12%. This means that if you receive income from the endowment, your income tax will be levied at 30% and not your marginal tax rate. There is some flexibility in the first five years so if you need to withdraw money from the endowment in the first five years you can do so, however withdrawals are limited.
Another benefit of an endowment is estate planning. If you have designated a beneficiary, upon your death, the endowment is transferred and there is no CGT on the transfer. While there may be inheritance tax, if there is a beneficiary on the endowment, the endowment goes directly to the beneficiary and there is no executor fee. With executors’ fees at 3.5% of the estate subject to VAT before VAT, on an endowment of R 1,000,000, this represents a saving of R 35,000, or R 250 40 if you include VAT.
It is very important that the endowment is transferred immediately to the beneficiary upon death, as this means that it is not trapped in the frozen assets of the deceased’s estate. When a person had a complex estate, it can be a saving grace in maintaining a source of income, especially when the deceased was the primary breadwinner.
Endowments can be subscribed in the name of a natural person or a legal entity such as a trust. Using a trust, especially when large sums of money are involved, can be a very effective mechanism for distributing income to beneficiaries. A trust is a separate vehicle from the founder of the trust and, as such, when the person dies, the trust continues. The trust is also subject to tax on its own, which means that with effective estate planning, a person can significantly reduce their inheritance tax and capital gains.
The investment portfolios within an endowment vary from product to product. What distinguishes an endowment from a retirement annuity is that it is not bound by Regulation 28. Regulation 28 is a law that limits the exposure of retirement money to particular assets. . By not having this obstacle, an endowment can be completely invested abroad. Not having the constraints of Reg 28 means that your financial advisor must be knowledgeable enough to determine exactly which funds will be most appropriate for your needs. Fortunately, at Brenthurst we have highly qualified advisors with the experience to navigate the world of investing.
An endowment is certainly not for everyone. In general, you need to have a large amount of money to invest, an investment horizon of more than five years, and a tax rate of 31% or more. It is important to meet with a qualified financial advisor to help you determine if an endowment is right for your needs.
Taking a holistic view of investments and questioning every aspect of investing, from asset manager and asset allocation to the investment vehicle, requires a diligent financial advisor with the experience and skill to understand when a particular strategy is required to meet a specific need.
Brenthurst Wealth believes that a wrong decision when setting up an investment can lead to a drop in performance. It is therefore essential that every aspect of the investment is carefully considered. We form long term relationships with our customers and we know that as a business, if we provide superior service and act diligently and consistently, our customers will be satisfied and our business will continue to grow.