Question

My financial adviser recommended that I invest in an endowment. Is this advisable? I’ve heard bad things about it.

Answer

For many South Africans, endowments still carry the memory of expensive life policies sold as “investments” with glossy brochures, large upfront commissions and disappointing outcomes.

So, when an adviser recommends one today, the instinctive reaction is scepticism. This reaction is understandable — but it may also be outdated.

Like many financial products, endowments have evolved. The question is no longer whether endowments are “good” or “bad”. The real question is whether they are appropriate for your tax position, your investment horizon and your broader planning strategy.

Let’s unpack this carefully.

Historically, endowments were structured in a way that deserved criticism. They were sold as investment solutions but were wrapped inside life policies that allowed advisers to earn significant upfront commission. Investment choices were often limited to in-house funds. Allocations into the market could be low in the early years, and returns were frequently underwhelming. Investors paid heavily for a structure that did not necessarily serve them well.

That is where the negative reputation was born.

But modern endowments, particularly those offered on contemporary investment platforms, look very different. Today, an endowment is essentially a tax wrapper around a unit trust portfolio. The underlying investments can be the same funds you would hold in a discretionary investment. The difference lies not in the investment engine, but in how the tax is applied.

And this is where the numbers start to matter.

Tax inside an endowment is levied at 30%. This means that CGT would be levied at 12%. For individuals taxed at the top marginal rate of 45%, the effective capital gains tax rate is 18%. In that context, reducing CGT from 18% to 12% through an endowment structure can be meaningful.

There is, however, a trade-off. Endowments come with a five-year restriction period. During those first five years, you cannot fully withdraw the investment. You are typically allowed one interest-free loan and one surrender, but flexibility is limited. After five years, access becomes far more flexible.

For short-term money, that restriction is inappropriate. But for capital earmarked for long-term growth, the five-year lock-in is often irrelevant. In fact, it can enforce discipline.

Estate planning is another area where endowments can add real value. You can nominate a beneficiary on the policy. When you die, the proceeds are paid directly to the nominated beneficiary and do not necessarily flow through your estate. That can reduce executor’s fees, which are typically 3.5% plus VAT which works out to just over  4%. On a R5 million investment, that is approximately R200,000 in potential costs. Avoiding that leakage is not trivial.

There is also no deemed capital gains tax event on death inside the policy itself. Capital gains are only triggered when withdrawals are made. For investors concerned about preserving inter-generational wealth, that matters.

Creditor protection is another often overlooked benefit. Once an endowment has been in force for more than three years, it generally enjoys protection from creditors under the Long-Term Insurance Act. For business owners and professionals exposed to litigation risk, that feature alone can justify the structure.

A close relative of the endowment is the sinking fund. It is structurally similar but does not have a life assured.  This makes them an excellent investment vehicle for trusts and companies. For trusts in particular, shifting growth assets into a sinking fund can reduce effective capital gains tax from 36% down to 12%. If you are running growth assets inside a trust and ignoring this option, you may be paying far more tax than necessary.

But none of this makes endowments automatically superior. An endowment does not fix a poor portfolio. If the underlying investments are weak, the wrapper cannot rescue performance. The structure optimises tax and estate planning. The portfolio must still be well constructed.

The real danger today is not the product itself. It is advice that fails to justify it. If an endowment is recommended without a clear explanation of your marginal tax rate, your time horizon, your liquidity needs and the total cost structure, then caution is warranted. If it is sold primarily because it generates upfront commission, that is a red flag.

But if the numbers are sound,  your marginal tax rate exceeds 30%, your investment horizon is longer than five years, and  estate efficiency is important — then dismissing endowments because of their history would be a mistake.

Used correctly, modern endowments and sinking funds can form a sensible part of a long-term investment strategy, particularly for high-income earners and trusts. Used incorrectly, they become expensive and inflexible.