There’s more than one way to save up for retirement, with benefits and disadvantages linked to each. An endowment policy is one such option.
What is it?
An endowment policy is an investment product offered by life insurance companies for after-tax investments. It helps the investor to save regularly until the plan reaches maturity. Endowments are aimed at high-income earners who don’t require liquidity.
Is there a difference between the old generation and new generation endowment policies?
As was the case with retirement products, old generation endowment policies were expensive and heavy on fees and commissions. A termination fee was also levied when the policyholder wanted to cash out before the end of the investment term.
New generation endowments don’t have termination penalties. The investor can also select the underlying investment options. Regarding fees, remuneration is either fee-based or commission-based, and the investor has the option to determine their advisor’s remuneration.
How are they taxed?
Interest income earned on an endowment is taxed at a flat rate of 30%. If your tax bracket is 41%, for example, you will pay less tax on an endowment. Capital gains tax (CGT) is also lower at 10%. If your tax bracket sits below 30%, you’ll end up paying more tax.
What are the rules?
During the first five years, one withdrawal and one surrender are permitted, where the maximum withdrawal amount is the amount invested plus 5% interest.
How might it benefit my journey to retire well?
Endowments have no maximum restriction levels for equities and offshore investments, and allows the investor more global exposure. Retirement savings products, on the other hand, are mandated by regulation 28 to maintain a maximum level of 75% equity exposure and 30% offshore exposure, which can impact returns for investors.
Learn more about endowments in this episode of The Fat Wallet Show.
Saving for retirement is the biggest investment most of us will ever make. Sadly, it can also be very complicated. In this monthly blog, we try to answer some of the retirement questions we hear most often, ranging from which products are best suited to different circumstances to efficient tax treatments. Words by Carina Jooste.