Understanding endowment policies (#217)

The Fat Wallet Show from Just One Lap

I’ve been avoiding talking about endowment policies, because what even are they? I haven’t come across one in my own investment life. This week, a question from Sandile sent me down the endowment road. I had fun with it. I got the Tax Elves involved. They had fun with it. Fun was had by all.

Endowments are the love child of insurance and investments. They have a five-year lock-in period, a tax rate of 30%, a life assured and a beneficiary. If you are in a higher tax bracket and looking for a long-term investment vehicle, endowments are worth investigating. They can also play a role in estate planning. It pays out directly to the beneficiary, which is great if you are leaving someone behind who is financially dependent on you. As De Wet de Villiers pointed out, the fact that they pay out tax-free doesn’t mean they’re not taxed in the estate. It simply means the estate is liable for the tax, not the beneficiary.

In addition to teaching me a thing or two about endowments, Sandile’s question could serve as a template if you’re hoping to add new holdings to your portfolio. His clear reasoning and systematic approach to adding this investment is worthy of emulation.

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Win of the week: Pru

I’ve tried to break up with my advisor for the last year, but it has been difficult! Everytime I say to him, we need to talk and I want to move my investments, he takes me out on a nice date, listens to me and then goes on to scare me into staying with him.

He tells me EasyEquities is not the right platform for me and I should be careful of companies like 10X. It does not help that he also butters me up and tells me how great I am, while also telling me about his life, so I end up feeling I can’t leave him because he confides in me. My people-pleasing self feels bad for wanting to break up with him. It's the perfect emotionally manipulative relationship and I JUST CAN'T LEAVE!

How does one amicably break up with their financial advisor? More importantly, how do you leave them when you have a fear of managing your money independently?

I have listened to your podcast, and some episodes more than once. I read Sam Beckbessinger's book and Vicki Robin's book called Your Money or Your Life. I aspire to be a Patrick Mckay and I have a financial strategy to reach FIRE, but my greatest hurdle is letting my financial advisor go and trusting myself that I can manage my investments myself.

When he is not around I feel as though I can manage my money independently and I do not need him, but after meeting with him, I leave with a great sense of fear about moving my TFSA from Sanlam to Easy and moving my RA from Discovery to TenEx or Outvest.

All the financial aspects that do not involve him I have managed relatively well, like my emergency fund. I know I can manage my money, I just fear that if I move my investments to the "big bad world of ETFs" (which is how he makes it sound), I will lose everything! I know he may be playing Jedi mind tricks on me, but how do I stop myself from being tricked! Also, he is not a bad person, he is a very nice guy, but I think this is part of my problem, I am making this whole relationship too personal! I feel defeated!

Sandile

I stumbled on this product by Sygnia where you can get direct exposure to Berkshire Hathaway.

Here is why I’m looking into buying into this fund:

• I believe that Berkshire is going to have ample opportunity to buy really decent businesses at decent prices as Covid continues to decimate some much needed industries.
• I believe Berkshire is one of those great businesses that one can buy at a decent price, thanks to Covid;
• I bought a few units in late Jan through EasyEquities and the costs to transfer funds and transact in USD was rather hefty, so I think I’ll leave that to a local fund to handle that;
• I have looked at the S&P500 (which I hold) and in my view, the Berkshire allocation there is rather small and I’d like more exposure;

Sygnia offers this fund for “discretionary savings into a 5-year endowment, a retirement annuity or a living annuity”. I would like to avoid setting up an RA with yet another service provider at the moment and I have no need for a living annuity, which leaves me with the endowment fund option.

From the little that I could read up on endowment funds:

• I am fairly comfortable with the idea of leaving the cash invested for at least five years (if not more);
• My marginal income tax rate exceeds 41% so at 30% tax, the fund is saving me some element of tax;
• I have set up an emergency fund (around 6 months’ salary) so I think the risk of cancelling the endowment before 5 years is low;
• TFSA has been maxed for 2021 year of assessment. I contribute far less than the allowed 27.5% into my RA (I am busy assessing contributing into an RA vs increasing my employer-pension fund contributions);
• I am just uncertain if I’m opening myself up to more unknown risks/complications/costs by using this structure.

Kimberley

I am a shareholder for a company who has moved operations to Mauritius.

If our company is lucky enough to declare dividends, this will now be paid in USD.

How does this affect my tax?

Is there a way I can get it in ZAR without losing so much to tax or is it better I keep it offshore ?

I like the idea of keeping it offshore for emergencies or as a “life insurance” for me when I pass away to leave to my daughter. Is this possible with only holding a SA passport?

Perhaps I could open an offshore trust and list her as the beneficiary and the dividends get paid into that?

Could I open a USD trading account on EE and get the dividends paid directly to that?

Is what I’m wanting to do by not bringing it into SA even legal?

I feel there are not enough bubbles, chuckles, coffee and chai tea to get me through the questions I have and the changes I need to implement to get my financial ducks in a row. Right now these ducks have ADHD and when they seem to be in a row, they decide to go off on a fucking tangent.

Anton

I inherited a farm in 1994 and sold it in 2019. I have the value of it when I got it and when I sold it. I did not get a valuation in 2001 when CGT started. I would like to know how to work out the CGT on this transaction.

Download the calculator here.

Moore

I am 27 and have a pension/provident plan with my employer. I would like to have an RA for a top up.

I would also like to invest in shares. I don't know how to go about doing any of those.

I have an EasyEquities account but I don't really know which shares to target, and for which amount every month. I have a R1000 that I can divide for those two financial goals. With that amount of money and my age, I am not even sure if that will be enough to contribute. I’ve only been exposed recently to this saving and investing movement. I was so ignorant.

Thanks to the Fat wallet Community on Facebook I have managed to put some savings for Emergencies with Tyme bank.

Catherine

I’ve tried the Interactive Brokers demo account and find it a little intimidating. I don't know what options or margins are, and I don't want to enact them by mistake by clicking the wrong button. I also imagine their customer service is not catered for noobs like me. Having said that, the platform is becoming less intimidating the more I play with the demo account.

Another option is to buy the shares through a Standard Bank Webtrader account, which has broker fees of 0.345% and annual account fees of 0.26%, and then transfer the amount across to my EasyEquities USD account to avoid paying ongoing annual fees.

Do you have any thoughts on each of these options, considering that my goal is to pay the lowest fees possible over the next 20 years, but also have a relatively user-friendly experience.

I don’t have a credit card. The only time this has ever been a problem is when a hotel or car rental company requires a credit card for a booking or deposit. It is pretty frustrating being at an airport and unable to rent a car. And are there any ways to get around this booking/deposit problem without having a credit card? And do you know of any reasons to have a credit card aside from this (assuming I don't need the credit)? Are credit cards generally better than debit cards for general spending while travelling?

Melisha

I have two kids in grade 4 and grade 0. I usually save up the school fee money to pay once off and get a 5% discount in December of the previous year.

I anticipate a 10% increase in school fees. So essentially I need to save R20k a month for both kids' school fees for the 2021 school year.

We usually put the money into a savings account but now the interest rates are so low. At the moment the money is in a Tyme bank account goal save but i was wondering if there was something better out there? Something with low risk, short term and potentially to beat money market type accounts.

Our friend Walter made a site called Rate Compare https://www.ratecompare.co.za/.

Tristan

Lately I have been seeing ads on YouTube for a financial service app called Franc.

It has 4 stars on the Google Play Store but I was wondering if you had heard of it, seen it or tried it? Lastly, can we trust Franc?

Ken

What is all the hype over Mexem Africa about? I have gone to their website but, quite frankly, it looks like a scamsters website (although I thought the same about Easy Equities' website too, before I started using it).

I don't see any info on tax free accounts, and they mention all sorts of foreign currencies but not much about how you convert your rands to Dollars/Euros/etc...

The little section on fees is as clear as mud. As an ETF investor (tax free and discretionary) should I be looking into it in a bit more detail? Would really appreciate a chat between you and Simon on this.

Brian

I've been with etfSA since 2012. I am busy updating my etf portfolio and want to know if I should shift some funds or all to Easy Equities. I've already bought MSCI China through my Easy Equities account that I registered a few weeks ago. What is your suggestion?