Illustration: Colin Daniel

Over the past two weeks, I’ve had a go at the big life assurance companies and the investment products they sold so freely until relatively recently with, as far as I can gather, more regard for their bottom lines than their customers. 

And although the environment has changed and legislation now forces financial services providers to give you appropriate advice, disclose costs and put your interests first, there are still many thousands of people out there who are chained to old-style (“legacy”) contractual policies that (a) have high costs that were not disclosed; (b) in many cases have disappointed in terms of investment returns; and (c) penalise you for breaking the contract through ending it early or reducing or stopping the premiums.

I invited readers who had positive experiences of any of these legacy products to contact me, but so far I have only received more tales of woe.

If you are stuck in one of these legacy retirement annuity (RA) or endowment policies and want to get out, you will have to weigh up paying the penalty versus the costs of staying invested until maturity. It’s best that you do this under the guidance of an independent, professional financial adviser/planner who is a Certified Financial Planner professional (CFP) and member of the Financial Planning Institute (FPI). These upstanding men and women are not only properly qualified to advise you, with a Postgraduate Diploma in Financial Planning (or higher); they also adhere to the FPI’s code of ethics. For more details and to find a CFP practising in your area, go to the FPI’s website, www.fpi.co.za.

You may not have much luck with your life company in getting a penalty reduced, but if you were put into one of these policies since the Financial Advisory and Intermediary Services (FAIS) Act came into operation in 2004, you may have a case against your adviser if he or she advised you inappropriately or did not tell you about the contractual nature of the product. In this case, you can complain to the FAIS Ombud (see contact details, below).

Endowment policies

The life companies are cleaning up their act when it comes to the design and marketing of new investment products. Both tighter regulation and increased competition have played a role in the improvements.

Endowment policies have always had some attractive benefits, but these have, until recently, been largely outweighed by their disadvantages. 

The new-generation products, however, have lower costs, are more transparent, with greater choice of underlying investments, and are less onerous in terms of contractual conditions. 

There are several areas in which new-generation endowment policies, offered both by the traditional life companies and some of the bigger asset managers that have a life assurance licence, such as Allan Gray and Oasis, may prove attractive to you as an investment option.

• Tax relief for high-earners. Roenica Tyson, the investment product manager at Glacier by Sanlam, says the personal income tax bracket of 45% introduced last year remains daunting for high-income earners and trusts. She says endowments under the individual policyholder classification, available to individuals, as well as trusts with individuals as beneficiaries, are subject to tax on interest income at 30% and effective tax on capital gains (CGT) at 12%. 

This may represent a significant saving for someone on a 45% marginal rate, and who would pay CGT up to an effective 18%. (Dividends are subject to a withholding tax of 20%, as they would be in any discretionary investment.) Note that the saving doesn’t take into account your annual tax exemption on interest income or the CGT exclusions, so the benefits would become apparent only once you had exhausted these exemptions. 

Trusts, other than special trusts, would pay also 30% tax on income and an effective 12% (instead of 36%) on capital gains.

• Estate planning benefits. An endowment policy works like an assurance policy in an important respect: on your death it will pay out directly to your beneficiaries instead of into your estate. (Only if you do not name any beneficiaries, will it pay into your estate.) This will give your loved ones cash immediately on your death, as would a life policy, at a time when your bank accounts and unit trust investments will be frozen. The winding up of an estate can take months, if not years, depending on its complexity. Your estate also does not pay executor’s fees (of up to 3.99%), on the investment, 
Tyson says.

• Access to smoothed-bonus portfolios. Endowment policies allow you to access smoothed-bonus portfolios offered by the life companies. Although there is still some concern about the transparency of these portfolios, their intention is noble: to provide you with market-related returns but without volatility, by holding back returns in good years in order to boost returns in bad years.

• Other benefits. Tyson lists the following additional benefits of endowment policies:

– Simplified tax administration, because tax is recovered within the endowment and taken care of on behalf of the investor.

– Insolvency protection: the entire value of the policy is protected against creditors after three years. This protection will continue until five years after the termination of the policy.

– No restriction on maximum levels of equities and offshore investments, as is the case with retirement-saving products.

– The ability to draw an income after the five-year restriction period (see below) has ended. This can be done on an ad-hoc basis, without you being forced to withdraw money at specific intervals.

Eyes wide open

These investments may be something to consider, but only in the right circumstances and only if you go into them with your eyes wide open regarding your contractual obligations. 

The minimum term is five years, and, although some companies may not penalise you for reducing or stopping your contributions, access to your savings is restricted during this period. You are allowed a single withdrawal during the restriction period, although this may incur a penalty. 

Shop around, comparing benefits, contractual conditions, and costs, of which there may be several layers: advice fees or commissions, platform fees, and investment fees.


CONTACT THE FAIS OMBUD

The Ombud for Financial Services Providers is Noluntu Bam.
Telephone: 012 470 9080 or 012 762 5000
Fax: 086 764 1422 or 012 348 3447
Post: Sussex Office Park, 473 Lynnwood Road, Lynnwood, 0081
Email: [email protected]
Website: www.faisombud.co.za

[email protected]