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We live in a globalised society. Your microwave comes from Korea, your fridge from Germany. Your car is Swedish (although most of its parts are made in China), and your favourite restaurant is Italian. Of course, you’re also proudly South African on a Saturday afternoon when the chops are sizzling on the braai and Siya Kolisi is leading the boys into battle. 

Unfortunately, your money doesn’t have as much international freedom of choice. Your retirement savings, especially, are hamstrung by Regulation 28 of the Pension Funds Act, which governs how assets must be allocated within a retirement fund. This despite the fact that the South African economy represents less than 1% of global economic activity, and that returns on local equity have been average over the last few years. 

Enter the endowment…

The use of an endowment to house an offshore discretionary portfolio is often overlooked, despite its clear tax and estate planning advantages.

In the past, endowments offered by life companies typically contained rather rigid investment baskets. They were also expensive – both in terms of ongoing fees, and penalties if you wanted to access the fund during the five-year restriction period. 

This is no longer the case. New generation endowments allow you to select the underlying investments. Also, as an investor, you can negotiate the financial advice fee as opposed to having it determined by the life company. 

Hang on, what exactly is an endowment?

Think of it as a ‘wrapper’ around a bunch of investments, which can include offshore unit trusts and/or equity depending on your risk profile and investment objectives. An endowment has a five-year restriction period, but you are allowed to make one withdrawal during this time which is limited to the amount you invested plus 5% compound growth per annum. 

There’s lots of flexibility within an endowment: underlying investments can be switched at any time, there’s no restriction on the maximum equity component (as there is for a retirement fund) and there’s no cap on the maximum amount you can invest. 

You can also make ad-hoc contributions. But bear in mind that if the additional investment exceeds more than 120% of the highest contribution invested in the previous two years, the endowment will enter a new restricted period. You can nominate beneficiaries for the ownership of the endowment, or its proceeds, and after the five-year period has passed, you can withdraw as and when you need to. 

Let’s look at the numbers

You can use your annual foreign capital allowance of R10 million to fund an offshore endowment, as well as your R1 million discretionary allowance. 

Setting up an offshore endowment usually requires a minimum lump sum payment of US$25 000 and a minimum amount of US$10 000 for additional contributions. (The exact amounts will vary depending on the provider.) 

Although contributions to an offshore endowment are not tax-deductible, there are still tax advantages – especially for investors who pay more than 30% income tax as earnings within the endowment are taxed at a flat rate of 30%.

What’s more, there’s no capital gains tax when the policy is transferred to your beneficiaries after you pass away, or if you withdraw the capital after the restriction period has ended. In fact, the tax administration of an endowment is relatively simple: tax is calculated, collected and paid directly to SARS by the provider of the fund.

More estate planning benefits

While an endowment is part of your estate, it’s viewed as a life insurance product and the proceeds are transferred immediately to your nominated beneficiaries when you die. Furthermore, the endowment is not subject to executor’s fees, which can be as high as 3.99% of the value of the investment. 

An offshore endowment can also help circumvent problems that arise when overseas jurisdictions don’t recognise your South African will. A foreign executor isn’t required to manage the distribution of an offshore endowment, and it protects your estate against foreign inheritance tax. 

How do I do it? 

Offshore endowments are offered under the Life Insurance license on various LISP platforms including Investec, Momentum, Sanlam Glacier, Liberty and others. The terms and conditions vary and it’s critical to understand them. 

This is where we can help – we’ll guide you towards the right endowment product, taking the rest of your investment portfolio and your savings goals into account. We will also ensure a sound selection of underlying funds, with sufficient equity for long-term growth.

Speak to us about this exciting opportunity to increase your offshore exposure for extra peace of mind.