BOITUMELO NTSOKO: Welcome to the Money Savvy Podcast. I’m Boitumelo Ntsoko. As parents we want to set up our children for future success. A major part of this is ensuring they have access to the best education we can afford, and for some parents, this may include investing on their behalf and saving for a lump sum to set them up when they begin their adult life.
If this is your aim but you are unsure which products to use to achieve your goal, Craig Torr, who is a certified financial planner at Crue Invest is here to shed some light. Welcome, Craig.
CRAIG TORR: Thank you very much. I’m looking forward to the discussion.
BOITUMELO NTSOKO: It’s recommended that you start saving for your child’s high school and tertiary education as soon as they are born. But what if you are unable to? Is it too late to start at a later stage?
CRAIG TORR: Look, it’s never too late to start, but of course it does become more difficult the later one leaves it. But one has to bear in mind that kids are quite expensive from the day they’re born, so a lot of those costs that you incur are already built into your budget. For example, even going to a pre-primary may cost half as much as an actual school does. So the difference that you have to fund when they get to school and university is not always as much of a problem as one would imagine, just because you’re used to having (those costs) in your budget already.
BOITUMELO NTSOKO: When saving for your child’s education, should you focus on finding good-quality primary, high school or tertiary education – or all of them?
CRAIG TORR: I think a good grounding is essential. I’m not an education specialist, so all I can comment [on] is from a personal perspective. I think if you can give your children the best of all three that is obviously first prize, and that should be something one should strive towards.
BOITUMELO NTSOKO: How much should you ideally aim to have saved up for both tertiary and secondary education?
CRAIG TORR: … I ran some numbers [on] the typical high school, and I’m talking from personal experience. A very good government school in Cape Town costs R60 000 a year. So in order to have a lump sum the day that your child is born, to be able to cover five years of tertiary education and that R60 000 per year – in today’s terms you need about R170 000 as a lump sum the day they are born. So that R170 000, adequately invested at a growth rate of inflation plus 4%, should grow to a point where it can support five years of high school education.
The scenario that we ran for a typical University of Cape Town sort of undergrad degree shows it costing R75 000 a year – that would be the tuition. Again, you’ve got a little more time on your hands because you’ve got until the child turns 18 for the money to grow. So the lump sum required would be about R145 000.
I hope those numbers help. It’s just really a case of saying how much you would need on the day the child is born to fund four years’ worth of tertiary education is the R145 000 lump sum.
BOITUMELO NTSOKO: Now, most people would not have lump sums readily available to invest, so how much should you ideally be contributing each month towards your child’s tertiary education?
CRAIG TORR: If we’re looking at just the tertiary piece, using the various calculators that are available, a figure of R900 per month – but growing every year with inflation – should get you there.
So probably around, say, R1 000 month as a starting point, and then keeping pace with inflation every year.
BOITUMELO NTSOKO: What are the best products to invest in for your child’s education?
CRAIG TORR: Look the simplest way to do it, and the best way to do it in our view, is just to use a straightforward unit trust product. Obviously the question is whether you put the unit trust in the child’s name, or put it in the adult’s name? There’s always the risk that when the child turns 18, they can activate a withdrawal on that entire unit trust. So there is some risk there.
We generally advise parents to invest in their own names.
At least then they’ve more control over those funds for education purposes.
BOITUMELO NTSOKO: Just staying on education, what happens to an investment or policy, if anything, if your child decides not to pursue tertiary studies and maybe chooses to start their own business instead?
CRAIG TORR: Again, using a unit trust portfolio is very flexible, so it could be used for any purpose. That would be at the parents’ discretion. If it’s invested in the parents’ names they could decide whether they are going to release funds for the purchase of a car or for the funding of a business or for education. It’s really nice and flexible from that perspective.
BOITUMELO NTSOKO: And are there any education products the parents should consider investing in to cover their child’s education should anything happen to them?
CRAIG TORR: There, Tumi, we are talking about life-insurance products. Once again, there are products available typically in the group life space, where employees through their group life cover will have an education-protection benefit. Basically what the insurer agrees to do is to pay for those high school and tertiary education costs until the child is done with studying. If one were to do those calculations in their personal capacity, it’s really part of the financial needs analysis and would make up part of the reason you would need life cover.
You can always work back the numbers on a similar basis to what we’ve done now to get the correct amount of cover in place. It would really just take place via a typical life-insurance policy.
Nest egg savings
BOITUMELO NTSOKO: Moving on from education, if you want to have a nest egg to set up your children to either buy a car or have a deposit for a house later on in life, what’s the best way to go about this?
CRAIG TORR: You’re going to think I’m really boring here but, again, a unit trust would do the trick.
There is no holy grail or silver bullet; a unit trust would serve that purpose quite well.
BOITUMELO NTSOKO: What about tax-free savings accounts, maybe?
CRAIG TORR: Tax-free savings accounts – we tend not to encourage using those for children because there are lifetime limits on the contributions that can be made, and saving for the kids’ education is a sort of a medium-term goal, and
…you wouldn’t get the full benefit of using a tax-free savings account as much as you would if using it for retirement purposes.
Also, by the time a child is 18, using money out of a unit trust is not likely to have that much of a tax implication – if any at all. So typically do not use the tax-free savings account for this purpose; rather use the unit trust.
BOITUMELO NTSOKO: And if you want to jumpstart your child’s investment journey, what are some of the products you should be looking at?
CRAIG TORR: (Chuckling) Again, the unit trust. It would be, as I’ve mentioned, a simple, straightforward way to do it. Given all the flexibility that would be the route we’d suggest.
BOITUMELO NTSOKO: I know some parents have also thought about maybe starting a retirement annuity for their kids. Would that also be an option?
CRAIG TORR: It is an option and it does offer some benefits, the biggest restriction obviously being accessibility. If the intention is to secure your child’s retirement, it’s a massive benefit to put money in a retirement annuity for them. Just be aware that you can’t withdraw from that retirement annuity until age 55.
The other sort of implication or something to be aware of is that there wouldn’t really be tax efficiency, simply because the child would not typically be earning taxable income. Therefore there’d be no tax benefit to putting money into the retirement annuity on the initial contribution. However, all the growth inside that fund would be exempt from tax over the lifetime of that investment, so there would be some benefits in that regard.
BOITUMELO NTSOKO: And would it be worth it to maybe buy shares for your child?
CRAIG TORR: Absolutely. Any investment is preferable to spending the money and having nothing to show for it. Absolutely. You will get growth in equity markets. Typically South African equity markets have beaten inflation by about 7% per annum over the last 120-odd years. That essentially means that you are doubling your purchasing power every 10 years, which is quite significant.
So, if you are investing a share portfolio in a child’s name and you’re doubling your purchasing power every 10 years, by the time they turn 20 they’ll have four times the amount of money, arguably, in real terms.
That is quite significant.
BOITUMELO NTSOKO: And once you’ve invested in your child’s name, what are the tax implications you should be aware of?
CRAIG TORR: In your child’s name the tax implications – there’s obviously the potential of capital gains tax, and tax on any interest earned inside the investment, but there are annual abatements. For the child before they’re actually earning taxable income the net effect is that they wouldn’t end up paying any income tax at the end of the day, because they’d fall below the tax threshold on the capital gain side of things if they’d sold units, and also on the interest side if they’d earned interest.
BOITUMELO NTSOKO: Thank you so much, Craig. That was Craig Tor, who is a certified financial planner at Crue Invest.