During this time only one loan and one part surrender can be affected. A part surrender is not a loan, which means that you permanently take your own money out of the investment. If, for example, you invested R3 000 for three years at 10% growth per year you would have about R4 045. But you can only part surrender R3 000 plus 5% growth, which is equal to R3 485, leaving R560 in the policy.

Individuals who want to retrieve the entire sum of capital invested can sell the endowment to a second party. The purchaser can then get the proceeds of the growth of the policy tax free.Due to this restrictive five-year period there has been a significant secondary market in endowment policies, which have reached their five-year investment period or are close to doing so.

The availability of second hand endowments has allowed investors the tax advantages of the endowment structure without having to contractually invest for the five-year period. But before you get too excited about this product you should know that the receiver has finally started to take notice of this investment loophole. There is draft legislation in terms of capital gains tax-which may affect the desirability of such an investment.

If your broker is recommending that you invest in this type of product you should consider the following points:

Several references in the draft legislation presented in April of this year suggest that CGT is going to be all encompassing and will affect any investment, whether conducted through an endowment policy or not. There are a number of mentions in the draft about an additional CGT tax for owners of second-hand endowments. If this is indeed the case, investors with second-hand endowment policies could well pay CGT twice because the assurance company originally paid tax on behalf of the policyholder. If these investors are trusts or institutions, it is possible that the tax rate could be as high as 21% each time!

Gary says that it should be noted that none of these proposed changes have yet been promulgated and that any action taken now might be either unnecessary or even counter productive. The caution that is sounded is merely to identify the possible changing investment landscape. We need to continue watching developments in terms of the roll out of the CGT.

In fact many people are acting on the proposed legislation as if it is already law. You should wail until next year to get a true picture of the changes that will be effected. In the mean time, sit tight and keep saving.

The article was supplied by Gary Mockler, Chief Executive Officer, Grant Thornton Kessel Feinstein Financial Planning (Pty) Ltd. This division focuses on providing investment advice and asset management services to in the main, high net worth individuals but also to selected corporates. Gary can be reached on (011) 322 4512 for further comment.