Tax and Investments: Endowments

In this second article in our Tax & Investments series, we deal with tax and endowments.

Let’s start with the basics…

An endowment is a fixed term savings policy with a minimum term of 5 years.
During the 5 year term you can make one withdrawal, which you don’t pay back.  The amount you can withdraw is restricted.

You are also allowed one loan during the 5 year period.  This loan can be paid back with or without interest, but you are not obliged to pay it back.  As with the withdrawal (see above), the loan is subject to restrictions.  Click here for the actual definition of loans and withdrawals.

Premium increases are restricted to 20% per annum, and this is effectively 120% per annum as the increase allowed is the initial premium plus 20%.  If the increase is more than the allowable 20%, the investment will start a new 5 year term.

The income earned in the endowment is taxed in the hands of the insurer at 30% for individual policy holders.

Capital gains are also taxed in the hands of the insurer at an effective rate of 9.9% for individual policy holders.  There are no exclusions.  Click here to view the update “Update on Tax and Investments: Endowments”

Dividend Withholding Tax (DWT) of 15% is applicable to any dividends received.  You would receive the dividends net of DWT.

Other key points:

  • An endowment would be considered an asset in your estate.
  • You may cede your investment as collateral security with another party.
  • It would form part of an insolvent estate and attachable by creditors in the event of an estate being declared insolvent.

Sourced from Momentum