Many investors already have endowments in their portfolios, but don’t always realise just how valuable these structures can be.
Endowments and sinking funds can support your wealth journey, and are worth considering as part of your overall financial plan.
This is because in South Africa’s high tax environment, every bit of efficiency counts.
While discretionary investments are popular, wrappers like endowments and sinking funds offer unique advantages that can make a real difference.
Here are two challenges many investors face:
- Tax during life – South Africa has one of the most aggressive tax structures in Africa, with marginal rates up to 45%.
- Estate duty after death – Estates can take two to five years to wind up, with executor fees and delays eroding wealth.
Endowments and sinking funds help by offering capped tax rates (30% on interest, 12% on capital gains), simpler tax administration, and estate planning benefits such as liquidity at death and potential savings on executor fees – provided a beneficiary has been nominated.
Who endowments are best for
Endowments can be especially useful for:
- High income earners (marginal tax rate above 30%).
- Clients with clear succession plans.
- Families who may need liquidity while estates are being wound up.
- Individuals looking for creditor protection (which applies after three years).
- Clients who benefit from disciplined access to funds.
They are attractive for the following reasons:
- Quick payouts to beneficiaries.
- Creditor protection.
- Simplified tax administration.
- Income planning benefits (payouts aren’t taxed as regular income).
- Flexibility in nominating beneficiaries for ownership, proceeds, or both.
However, it is important to structure endowments correctly.
They must have a life insured, and ownership rights depend on proper beneficiary nominations.
Proceeds are net of tax (not tax free), and any disposal of units – whether by switching between funds or withdrawing – will trigger capital gains tax.
In complex family situations, multiple endowments or trusts may be advisable to ensure responsible distribution of funds.
Sinking funds – a different kind of fit
Sinking funds share the tax advantages of endowments but differ in structure:
- No creditor protection.
- No lives insured.
- Only allow nomination of a successor owner.
These features make them particularly effective for trusts, which don’t “pass away.”
Normally, trust income is taxed at 45% with capital gains at 36%.
Through Glacier, where all trust beneficiaries must be natural persons, sinking fund investments are placed in the individual policyholder fund, reducing tax rates to 30% on interest and 12% on capital gains.
The people who benefit the most are:
- High income earners (marginal tax rate above 30%).
- Families with estates at risk of liquidity shortages.
- Spouses who may face delays or lack of income during estate wind up.
- Trusts looking for tax efficiency and succession planning.
The rules you should know
Endowments are governed by the Long Term Insurance Act of 1998, Section 54, which sets rules for contributions, withdrawals, and loans during the initial five year restriction period.
Clients are allowed one surrender and one loan, with withdrawals limited to premiums paid plus 5% compound growth.
Ad hoc contributions cannot exceed 120% of the highest annual premium in the previous two years.
Here is a quick comparison between endowments and sinking funds:
- Both endowments and sinking funds have a five year restriction period, then become open ended.
- Endowments require at least one life insured, allow beneficiaries for ownership and proceeds, and provide creditor protection.
- Sinking funds have no lives insured, no beneficiaries for proceeds, and no creditor protection, but ownership can be transferred to a nominee.
- Tax treatment is the same across both products.
Thinking globally – offshore options
Offshore wrappers add another layer of value: diversification, access to global asset managers, and protection against currency risk.
They also simplify tax and estate planning by avoiding foreign inheritance taxes (situs tax), probate, and executor fees when beneficiaries are nominated.
Most offshore funds on the Glacier International platform are accumulating or roll up funds, meaning distributions are reinvested and taxed as capital gains rather than income – a tax efficient approach.
Offshore wrappers also allow multiple withdrawals within the first five years, and unlimited withdrawals thereafter.
Compared to direct offshore investments, wrappers reduce capital gains tax exposure, streamline succession, and eliminate the need for multiple offshore wills.
Bringing it all together
Endowments and sinking funds aren’t just tax efficient vehicles – they’re practical estate planning tools.
Endowments provide liquidity, creditor protection, and flexible succession planning, while sinking funds are particularly effective for trusts. Offshore wrappers extend these benefits globally, combining diversification, tax efficiency, and estate planning advantages.
Together, these structures can help you manage wealth more effectively, reduce tax burdens, and ensure smoother succession planning.
They’re especially valuable for high income earners, families, and trusts navigating South Africa’s complex financial landscape.
Endowments can play an important role in your portfolio, but they should always form part of a holistic financial plan designed with the guidance of an authorised financial adviser, who will take your circumstances and risk tolerance into account.
Click here to learn more about Glacier by Sanlam’s financial services.
