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Two investment options for your child’s future

I’m not completely convinced that the education policy route is the best way to go. I’ve reached an impasse.
A parent with a child in grade R in 2017 can expect to pay R1 332 112-R3 011 315 for public or private education respectively. Picture: Shutterstock

A Moneyweb reader asks:

I’m interested in planning for my children’s education. I have researched the options available, but am not completely convinced that the ‘education policy’ route is the best way to go. I have also researched other types of investment vehicles like endowment and unit trusts. 

I’ve reached an impasse. I’d like to ensure maximum return on my investment at the best interest rate possible; and minimise income tax liabilities and the like when I require payout. My investment term is 12-15 years. Please advise on the best route forward.

Mike Lombard - Pfire

With all the ‘savings’ options currently available this can be a daunting decision for any parent, guardian and even grandparent.

In January, Old Mutual’s John Manyike said: “Alarmingly, education inflation is higher than South Africa’s Consumer Price Index and this gap has widened from around 2% in the early 2000s to a probable 4% in 2017. This means that a parent whose child starts grade R in 2017 can expect to pay between R1 332 112 and R3 011 315 for public or private education respectively. This rand amount includes primary school, high school and a three-year university qualification in 2033.”

[It’s therefore very prudent to plan for your children’s education costs as you are].

Let’s look at a quick explanation of investment types:

  • Secured investments

This is where your capital is always fixed and you earn an interest from it. In other words, it is highly unlikely that you will lose your capital. Here you can choose to draw the interest or add it back to your investment. The interest may vary but your capital, for all intents and purposes, remains intact. The risk associated with losing your investment is almost nil. For example, savings accounts, fixed deposits, money market accounts.

  • Market-related investments

This is where your investment capital may be at some risk, because you elect to invest in something where the value of the investment rises and falls every day. How high/low the peaks and troughs reach in these types of investment cycles and how frequent is referred to as volatility. Often when talking to advisors on this subject, reference is made to investment performance (how well or badly it has performed) and then investment decisions are made based upon expectations and not certainty. The type of investments that are referred to here may include stocks and shares or unit trusts.

Wrappers 

So, if we keep this in mind, there are in fact only two big options available (see the table). Where it gets a little complicated is where the investment sector has been able to wrap any one of or a combination of the above options in one single investment product type. These product types are commonly known as ‘wrappers’ and may exist in many forms – many of which are found in policies.

We need to make some assumptions based on the question raised. Reading between the lines, we know the following:

  • The investment term: 10 to 12 years. While this is true, reference is also made to the reader requiring the payout. This implies the need for some measure of flexibility as well.
  • Investment performance is a priority and so we will assume that the reader is looking to take some measure of ‘market-related’ investment option
  • In the question reference is made to unit trusts, education policy, endowments and performance giving us an indication that the investor understands the investment types and risks.
  • From a risk and volatility viewpoint, ‘maximum returns’ are sought, but of course the fact that it is for children’s education means there needs to be some mitigation of risk – especially as it is over the long term. 

Of course, it should also be pointed out that in this response, we are only looking at Financial Services Board-approved investments and not at alternative investment schemes such as fixed property, private investment and the like.

So, where do you invest?

I’ve created a table below to highlight the reasoning behind the suggestion made:

 

Investment type

Wrapper

Taxation

Risk

Access

Comments

Market-related investment. Long-term 10yrs plus term view.

Tax-free investment. Maximum contribution is R33 000 pa (R2 750 pm) and R500 000 over a lifetime.

None.

All payments made from the investment are tax free (no income tax or capital gains tax).

Choose unit trust portfolios based upon own risk appetite from conservative to aggressive. Long-term outlook reduces risk over time.

Can access the capital anytime free of income tax and capital gains tax.

If you withdraw, the overall limit of R500 000 is not adjusted. E.g. if you invest R500 000 and draw R400 000, you cannot re-invest another R400 000 [tax free].

If the amount to be invested per month or overall is expected to exceed the maximum allowed this could be invested in part in the following:

Market-related investment. Long-term 10yrs plus term view.

Endowment wrapper

After five years, all payments made to the investor are tax free in the hands of the investor. No limits.

Choose unit trust portfolios based upon own risk appetite from conservative to aggressive. Long-term outlook reduces risk over time.

Can withdraw/loan once against the investment within the first five years, after which there is anytime access.

You can elect to buy guarantees but this is at a cost, as is the endowment wrapper.

One final and important point: investment decisions are never made in isolation of a more comprehensive, holistic estate plan. Only basic assumptions are being made here and issues around estate duty, liquidity, personal and financial circumstances, continuity and even the impact around who inherits your estate should you pass away all play a role.

Talk to your accredited CFP™ professional or contact the Financial Planning Institute to find one who can serve your needs.

 

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