ESTATE & TAX PLANNING
By Samuel Rossouw
6 September 2025
Imagine a magic wand that could ease your worries about capital gains and estate duties, unlock liquidity in your estate, and still deliver solid investment returns.
In this context, liquidity refers to investment products that can be quickly converted into cash.
If you browse the internet for long enough, it’s easy to believe such a magic wand might actually exist.
But the truth is, sooner or later, you—or your heirs—will have to pay the proverbial taxman. And even the most self-assured market commentators sometimes find their crystal balls a little foggy.
Financial products are designed to function as links in a broader chain, and every link has its own unique characteristics.
Understanding these traits can go a long way in helping you manage financial complexities more effectively.
The table below compares various products against key considerations.
Each product has its own rules regarding liquidity—some more restrictive than others. Make sure you understand these rules to avoid being caught off guard down the line.
At death, the value of a living annuity can be accessed, but it’s also possible to name either a testamentary or inter vivos trust as beneficiary. This allows the annuity to pass on tax-free, while the trust can take responsibility for the care of dependents and their heirs.
Endowment policies typically allow only one loan and one withdrawal within the first five years. So they’re not ideal if you anticipate needing regular access to funds.
Estate duty is levied at 20% or 25%, depending on the size of your estate.
Allocating most of your investments to compulsory funds can reduce your estate duty exposure. However, if a beneficiary withdraws these funds upon your death, up to 36% tax could apply.
If your estate is likely to attract estate duty at 25%, making donations during your lifetime could help reduce the overall estate, even if the donations tax is 20%.
In both scenarios, an overemphasis on one type of tax, either estate or donations tax, can result in a higher overall tax burden.
Capital gains tax comes into play when a capital asset is sold or transferred, and the applicable rate depends on who owns the asset.
Endowment structures are often touted as tax-efficient vehicles for capital gains, with a maximum effective rate of 12% (versus 18% for individuals in the top tax bracket of 45%). But rather than focusing on the entry point, it’s important to estimate what your marginal rate will be at the time of withdrawal.
Bear in mind that after retirement, your average and marginal tax rates typically decrease, and that you may draw down your investment gradually over several years, rather than in a lump sum.
Fund-of-funds structures can be highly effective in deferring capital gains obligations. All strategic shifts and rebalancing happen within the fund, not at the product level.
Within an endowment fund, capital gains tax can be deferred at death if the investment is bequeathed to a surviving spouse or inter vivos trust.
Investment structuring is really about diversifying both across asset classes and geographies.
It’s well known that retirement annuities limit offshore exposure, but in return, they offer exemptions from dividend tax, income tax, capital gains tax, and estate duty.
However, focusing purely on tax advantages is a narrow approach. The day you exit these products, the income is once again subject to tax.
Similarly, making decisions based on the historical performance of asset classes can be misleading.
Who, for example, would have guessed that the average South African high-equity category (commonly used in local annuities) would outperform the MSCI World Index by nearly 22% over the past five years?
Some financial practitioners have even suggested cashing out pension funds, paying up to 36% in tax, just to invest offshore.
But an investor who withdrew R2 million from a pension fund (currently tracking a high-equity strategy) to invest in an MSCI-linked offshore fund would have ended up 54% worse off after five years.
To catch up over the following five years, the offshore investment would need to outperform the original strategy by double, assuming the local high-equity category grows at a steady 10% annually.
Ultimately, your financial plan should align with your long-term goals, and include a blend of product structures and well-considered, valuation-based investment allocations.
Don’t be swayed by one-size-fits-all solutions, generic advice, or advisers chasing their own incentives. Focus on the bigger picture, and lay the foundation for long-term financial peace of mind.
Samuel Rossouw is a Certified Financial Planner® at Woodland Wealth. Contact him at info@woodlandwealth.co.za.
Although all possible care has been taken in the preparation of this document, the factual correctness of the information contained herein cannot be guaranteed. This document does not constitute advice and anyone who intends to take any financial action based on this document is strongly advised to first consult with his/her personal financial advisor. Woodland Wealth is an authorized financial service provider with FSP no. 5966.