Supplied
Supplied
Hardi Swart.
Hardi Swart.

PLANNING POINTS: 

Most South African investors appreciate the need to invest offshore to benefit from geographic diversification, to hedge their investments against the Rand, and to gain from the higher economic growth rates in other countries.  The use of endowments to house offshore discretionary portfolios is often overlooked, despite their clear tax and estate planning advantages. Read on for the basics and good reason to consider an offshore endowment in your wealth portfolio.

A new world 

In the past, endowments offered by life companies were inflexible regarding the underlying investments, and expensive regarding fees and penalties when investors needed to access their funds before the end of the investment term.  New-generation endowments, however, allow you to select the underlying investments and there are no longer any early termination penalties. Also, as an investor, you can now set the financial advice fee, as opposed to it being determined by the life company.  

The fundamentals  

Endowments are ‘wrappers’ around investments, which can include a range of offshore unit trusts and share investments that suit your risk profile and investment objectives.  They require a five-year commitment period, but you can make one withdrawal should you need to during this ‘restricted period’. This ‘restricted’ withdrawal amount is limited to the amount you invested plus 5% compound growth per annum. 

The return from the fund is not guaranteed and is linked to the performance of the underlying investments, which can be switched at any time.   There’s no restriction regarding the maximum equity component of the fund, as there is for retirement funds, and there’s no cap on the maximum amount you can invest.   You can also make ad-hoc contributions to the fund, but if the additional investment amount exceeds more than 120% of the highest contribution invested in the previous two years, the plan enters a new restriction period. 

You can nominate beneficiaries for ownership and proceeds of the fund, and after the five-year period, you can withdraw funds as you wish to.  

How much?  

You can use your annual foreign capital allowance of R 10 million and R 1 million discretionary allowances to fund your offshore endowment. They usually require a minimum lump sum of US $25,000 and a minimum amount of $ 10 000 for additional contributions. (The amounts can vary depending on the provider.) 

Take the break 

Endowments offer substantial tax advantages to investors who pay more than 30% in income tax.   The income earned within the fund is taxed at a flat rate of 30% and the effective capital gains rate is 12% (as opposed to 18% for top income earners and 36% for trusts).  This offers significant savings to an increasing number of South Africans as our relatively high inflation rate is pushing more taxpayers into the top income tax bracket of 45%.   

Also, there’s no capital gains tax payable when the policy is transferred into the name of your beneficiaries when you pass away.  And furthermore, the tax administration is also very simple in that its calculated, collected and paid to SARS by the provider of the fund. 

Benefits for the long haul 

Offshore endowments also offer key estate planning benefits.  They do form part of your estate, but as they’re a life assurance product, the proceeds are immediately transferred to your nominated beneficiaries and are not dependent on winding up your estate. The funds are also not subject to executor’s fees, which can be as high as 3.99% of the value of the investment. 

Offshore endowments also circumvent problems that can arise because overseas jurisdictions don’t recognise your South African Will.  A foreign executor isn’t required to manage the distribution of your offshore assets, and the endowment protects your estate against foreign inheritance tax, which can be as high as 40%. 

How to 

Offshore endowments are offered under the life insurance license of various LISP platforms including Investec, Momentum, Sanlam Glacier and Liberty. The terms and conditions do vary, and it’s critical to understand them.  (Glacier has recently launched a product that provides partial capital protection, but early termination penalties do apply.) 

There’s more 

There’s more to an offshore endowment than very significant tax savings and estate planning benefits. They encourage you to think long -term and stay the course. Do get assistance from a CERTIFIED FINANCIAL PLANNER® to ensure a sound selection of underlying funds which are regulated by Cisca and have sufficient equity for long-term growth. 

Hardi Swart is the Director of Autus Private Clients and Financial Planner of the Year 2019.

PERSONAL FINANCE