An Endowment Plan is an investment plan which allows the investor to create wealth tax-efficiently. This plan benefits investors with a marginal tax rate greater than 30% and a minimum investment time horizon of 5 years.
WHO CAN INVEST?
GENERAL TAX BENEFITS
- Investors with tax rates greater than 30% will benefit from an investment within an Endowment Plan.
- Income tax of 30% and Capital Gains Tax (CGT) of 12% applies to individuals and trusts (with natural persons as beneficiaries) within the Endowment Plan.
- The individual interest and CGT exemptions are not utilized and remain intact.
BENEFITS AFTER END OF RESTRICTION PERIOD
- Regular withdrawals after the 5-year restriction period may have tax benefits to the investor/plan holder.
- If a person is making regular withdrawals from the Endowment Plan to supplement their annuity income, the annuity income can be reduced. A reduction in annuity income, which is subject to tax at the investor’s marginal rate, will result in a reduction of the investor’s income tax liability.
- Withdrawals from the Endowment Plan are treated as capital reductions and thus are not subject to income tax, but are subject to CGT.
BENEFITS ON DEATH
- No CGT, where plan is transferred to a nominated beneficiary.
- No executors’ fees where a beneficiary is nominated.
- Plan holder proceeds are transferable directly to the nominated beneficiaries, and therefore are not trapped as part of the frozen assets in the deceased’s estate.
- Estate duty may be applicable.
- During the first 12 months there are no restriction on the amount that can be contributed.
- From year 2, the maximum allowable contribution is 120% of the total contributions for the previous 2 years (where applicable), whichever is the higher.
- Withdrawals are restricted during the first 5-years (one interest free loan and one surrender); however, after 5-years regular withdrawals are allowed.
- Withdrawals during the 5-year restriction period are limited to premium/ contributions made plus 5% compound interest per annum.
The Endowment Plan may be ceded or pledged as security.