Question

I want to invest some money that can do the following:

• I want my spouse to have quick access to the funds should I pass away – I do not want her to wait till the estate has been finalised
• I do not want the investment to trigger additional interest that is taxable
• I would like the investment to be excluded from my estate

Answer

Estates are currently taking a long time to get registered so it makes a lot of sense to structure your investments in such a way that your spouse can have immediate access to enough funds to live on while your estate is being finalized.

There are three options that you can consider

Bank deposit in spouse’s name

An option is to donate the funds to your spouse and have him or her keep these in their bank account.    This will trigger tax for them on the interest paid on the bank. The investment will be included in your joint estate

Sinking Fund or endowment policy

Another option is to take out an endowment or sinking fund policy in your name. What is nice here is that you can attach the beneficiary to this investment. This means that the proceeds of this investment will be transferred to your spouse upon your death. This is usually a quick transaction so your spouse should have access to these funds within a month.  This is a lot quicker than waiting for your estate to be wound up.

You must be careful with a sinking fund or endowment as you are only allowed to make one withdrawal from them during the first five years.  Once the five year restricted period is over, you may withdraw funds from the investment whenever you want.  Should you pass away within the first five years, your spouse will have ready access to these funds and may make as many withdrawals from the investment as he or she wishes.  The proceeds of this investment will form part of your estate

Any growth on the investments that are inside the endowment or sinking fund will not trigger tax in your hands. They will be taxed within the structure and be paid by the life insurance company from which you purchased the investment.  The investment will be taxed at the life insurance company rate of 30%.

Insider tip

If your personal tax rate is higher than 30%, you should consider using a structure like a sinking fund or endowment policy for your long term investments.  This will result in any capital gains tax that is paid at a rate of 12% instead of a potential 18%.

Living annuity purchased with a disallowed RA contribution

Another option to consider is buying a retirement annuity that you convert into a living annuity and make your spouse the beneficiary. 

The rationale here is that you can attach a beneficiary to a living annuity so that your spouse would be able to access the funds relatively quickly.  In addition, your retirement funds do not form part of your estate which could result in a saving of estate duty.

You are allowed to invest 27.5% of your taxable income into a retirement annuity.  These funds will not form part of your estate.

Any contribution above the 27.5% would be classed as a disallowed contribution.  As long as your beneficiary elects to receive the proceeds of this investment in the form of an annuity, this amount will not form part of the estate.

The downside of this type of investment is that your spouse will not have access to a large lump sum of money. He or she will only receive an ongoing income. 

I would recommend that you convert the retirement annuity into a living annuity as quickly as possible.  Retirement annuities are governed by the pension funds act and there is a responsibility on the trustees of the retirement annuity fund to perform a due diligence on any beneficiary payments.  This can result in significant delays in the payment of these benefits.

You have three options that you can consider, and it may make sense to use a combination of these products to get the most appropriate solution for your circumstances.  I have summarized the main benefits of these options on the table below:

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