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Think very carefully before investing in an endowment says financial planner

29 September 2019 11:59 AM
Tags:
Financial planning
Paul Roelofse
Personal finance
endowment investment
Paul Roelofse unpacks the real cost to your financial health, including a 30% tax rate during the minimum investment period.

Is an endowment policy a good choice when it comes to investing for your children or as a savings vehicle for yourself?

Certified financial planner Paul Roelofse says if you opt for this route, be very aware of some of the lesser known or understood rules of endowments.

Firstly, understand the minimum 5-year investment period, along with the tax implications of possibly paying Sars above your personal tax rate.

What actually happens after five years is that when you draw the money out of the endowment, it's tax-free. That sounds pretty good, but the lesser-known story is that inside the endowment during that minimum period you're investing, the actual proceeds _are _taxed and they tax at a flat rate of 30%.

Paul Roelofse, Certified financial planner

When you, for example, have the money in a money market fund, the fund itself will be taxed at 30% so you won't get the 7% that you think you're going to get.

Paul Roelofse, Certified financial planner

If your tax rate is less than 30% it doesn't really make sense to be involved in an endowment. You'd be far better off investing in those same funds on your own, without that 'wrapper'.

Paul Roelofse, Certified financial planner

When it comes to your debt load, Roelofse also points out that your yield from an endowment policy after tax and fees is not going to match the interest rate on, for instance, the credit card you're paying off.

The other restriction that could affect your long-term financial health is, of course, your money being inaccessible for five years.

Listen to Roelofse unpacking the pros and cons of endowments below:


29 September 2019 11:59 AM
Tags:
Financial planning
Paul Roelofse
Personal finance
endowment investment

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