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Johannesburg - Are you thinking of saving cash through your insurance but not sure what to do? Here are two options.
You can go through the endowment route, which allows you to earn interest through unit trusts, or choose a retirement annuity, which is a tax-efficient investment.
Endowments
An endowment is an insurance policy, bought from an assurer (that is, an insurance company selling life products) and used as an investment.
There’s no life cover at all involved (although of course you can nominate a beneficiary to whom the proceeds of the policy will be paid in the event of your death). You can add life and disability cover on request.
Your money is invested – often in unit trusts – to earn interest. Endowment policies have a fixed term, at the end of which the proceeds can be paid out, either as a lump sum or as portions withdrawn annually as a form of income.
One of the reasons why endowment policies have fallen out of favour in recent years is because of a lack of transparency about performance – man an investor has found, at the end of the term that they’ve earned far less than the golden promises made when they were sold the endowment in the first place.
If this is a concern, it might be better to opt for smoothed-bonus portfolios (which guarantee the capital intact plus a certain interest rate) or guaranteed endowments, which give you a quote of the matured amount, both capital and interest, and are obliged to meet that promise.
Retirement annuity
A retirement annuity is a good savings vehicle for people who are not employed by a company, or those whose company does not provide a company pension or provident plan.
It can also be used as a way of topping up your company pension or provident plan.
You can buy as many retirement annuities as you want – in other words, you can start with one RA at a time when you have limited spare cash, and expand by adding more RAs as your financial situation improves.
Should your financial position deteriorate, you can stop paying without losing too much, by making the RA ‘paid-up’. Obviously the amount you’ve paid over the years affects the retirement payments you’ll get in the end, so don’t take the paid-up option unless it’s really necessary.
It’s a tax-efficient investment which offers:
* Tax deductions on your contributions (up to a maximum of 15% of non-pensionable taxable income – if you are a freelancer or self-employed and not participating in any pension or provident fund, that basically means 15% of your total income; if you are participating in a pension or provident fund, you’ll need to find out how much of your income is pensionable)
* Tax-free investment returns.
* Favourable taxation on lump-sum benefits, with a portion being tax-free.
- Fin24
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