PRESCIENT RETIREMENT ANNUITY FUND

PRESCIENT SINKING FUNDS - INDIVIDUAL FAQ

Prescient Sinking Fund - Individual

WHAT IS A PRESCIENT LIFE D AND D SINKING FUND POLICY?

A Prescient Life D and D Sinking Fund Policy is an investment-linked policy underwritten by Prescient Life Limited.  Section 1 of the Long-Term Insurance Act defines a “sinking fund policy” as a policy, excluding a life policy, which provides one or more sums of money at a fixed or determinable future date.  The sinking fund policy type was introduced to allow corporate entities to invest via a long-term insurance policy.

HOW DOES A SINKING FUND POLICY WORK?

Sinking fund policies are legally required to have a minimum five-year term (also referred to as a restricted period, as it restricts the withdrawals that can be made from the policy).  This restricted period applies to:

 

  • The first five years of the policy; or

  • Five years from the first day of any month during which the “120% rule” takes effect (see next section).

 

Legislation provides that during any restricted period one withdrawal may be made from the policy.  The maximum amount that may be withdrawn is the lesser of:

 

  • The contributions during the restricted period, including any market value in the policy the day before the restricted period started, plus 5% compound interest per annum; or

  • The market value of the investment account less fees and charges. Any remaining balance (more than R2 500) must stay invested until the restricted period ends.

  • If the policy is not in a restricted period:

  • It is possible to withdraw part or all of the value of the policy; and / or

  • Make regular withdrawals and contributions from and to the policy at will.

WHAT IS THE 120% RULE?

The “120% rule” takes effect when the contributions in any policy year are greater than 120% of the higher of any of the previous two policy year’s total contributions. Prescient Life will accept these contributions into the same policy and extend the restricted period (if the policy is already in a restricted period) or start a new five year restricted period on the entire policy.

WHAT IS THE TAX TREATMENT OF THE POLICY?

In terms of income tax legislation, Prescient Life is required to pay income tax and capital gains tax (“CGT”) at a rate which depends on the tax classification of its policyholders.  Colloquially this tax treatment is referred to as the four funds approach.  Income tax is payable at a fixed rate.  A net capital gain is multiplied by the inclusion rate applicable to arrive at the taxable capital gain. Withholding taxes are withheld on local dividends and foreign dividends.  The income tax rates as well as the inclusion rates are set out in the table below:

 

 

USING THE POLICY AS SECURITY ?

The investment may be used as security or ceded through an outright cession.

TAKING LOANS AGAINST THE POLICY ?

Loans cannot be taken against the policy but a full or partial surrender may be taken in the restricted period.

TRANSFERRING THE POLICY ?

The policy cannot be transferred to another insurer.

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