Published Date: 2019-09-12 | Source: INCE|Community | Author: Simon Brown
An endowment is a structure that uses an existing accessed tax loss, in this case from OUTsurance Life, to offer excellent after-tax returns to investors. That said there are some details that one has to be aware of and the product would not be a great investment under certain conditions.
Firstly, there is a five-year lock in period, so this needs to be money that is not required in the short-term. OUTVest
will allow early partial withdrawals, but ideally this is investment is for a pile of money that you can put away for five years untouched.
Further we need to remember that SARS offers a tax emption on initial interest earned. If you're under 65 the first R23,800 of interest received every year is not taxed. If you're over 65 then you get R34,500 per year and only interest earned above this amount is taxed at your marginal tax rate.
So, if for example you're earning a rate of 8% on R200k then the interest earned would be R16,000 a year and not subject to tax so an endowment is of no use to you. But if you're under 65 and have R297,500 earning 8% then you're receiving interest of R23,800 and any further interest earned would be taxable. Then an endowment investment is a great choice for any further cash you need to invest.
Fortunately, the OUTVest website
will take you through a series of question to determine if their endowment is a worthwhile investment for your personal situation with a minimum investment amount of R100k.
The full tax-free return is currently around 6.5% a year after all costs. If you are in the highest local tax bracket of 45% and already earning you full tax-exempt interest allocation this is an effective pre-tax rate of just over 15%.
This OUTvest endowment
is a fixed outcome and includes all fees so if I invested R250k today at the effective 6.59% I would receive R344,084 in five years' time regardless of changes to interest rates or tax rate changes over that period.
Another important point is that one is required to nominate a beneficiary. So, in the event of your death the money is paid directly to your nominated beneficiary and will not be part of your estate. This will not attract executor fees saving your heirs time and money.
A last important point is that the actual interest rate changes and is provided by Absa. So, rates could be higher or lower when you apply, but a word of caution. Waiting for the rate to potentially tick higher may not work as it may instead tick lower. If the return works for your situation and you have the required minimum to invest for five years, then grab it.