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What amount should I set aside to invest for my child’s education?

It depends on how much you have available and how much the anticipated fees are going to be.

I have just sold my house, and have a one-year-old. I want to put a lump sum away for her education. I am 41 years old, with a smallish retirement annuity, income protector and about two months’ emergency fund. What amount would you recommend as sufficient to put away for her education? I worry if I don’t do it now while I have this money, I will not have the chance again in the future.

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Well done for thinking forward and wanting to make provision for your daughter’s education.

You did not specify whether you would like to make provision for her school expenses or post-matric education or both. Your intention for the investment will ultimately determine how the funds should be invested.

With schooling cost provision, your focus will be more on a liquid portfolio with a fair amount (say two to three years’ of fees) allocated to cash since you want to limit volatility as far as possible when drawing funds to pay for the month-to-month expenses. For the first five years of pre-school preparation, you can invest more aggressively. A suite of multi-asset unit trusts with a healthy chunk (say 50%) of offshore exposure should do the trick.

If your concern is funding post-matric exposure then I would suggest you invest in a tax-free savings investment (TFS). The portfolio can be similar to the one I referred to above but, given the investment horizon of 18 years, you can be much more aggressive with the portfolio construction. Remember that TFS contributions are limited to R36 000 per year. I suggest that you invest R36 000 in March in the new tax year. Should you wish to invest more than R76 000 then an unconstrained unit trust portfolio will be suitable.

Do not fall into the trap of investing in a five-year (or longer) endowment should you not invest via a TFS unless your tax rate is above 30%.

These products are often punted by tied agents who are incentivised by production targets and high commission …

Avoid capital gains tax

I would also suggest that you make the investment in your daughter’s name, especially if you are going to make use of a TFS.

Remember that capital gains tax will be applicable to any amount above R100 000 per year invested in your daughter’s name. Should you wait until she matriculates the investment amount would have grown to a sizeable amount, which will have a serious impact on donations tax.

By investing in your daughter’s name you also secure her future should something happen to you. The investment will not form part of your estate. On that note, please make sure that your will is up to date and that you have a suitable guardian nominated in your will.

Investment amount

The amount to invest depends on how much you have available and how much the anticipated fees are going to be. Monthly fees for schooling vary vastly from R1 000 per month in public schools to R20 000 per month for top class private schools including residence. The same applies to post-matric studies. Currently, you can work on a three-year ‘B degree’ at between R150 000 and R200 000 excluding residence. Many other courses are much more expensive.

The important thing is that you intend to start making provisions for your daughter’s studies and that is to be commended.

Any amount you invest will help, do not get deterred by the high costs. I would suggest that you also set up time with a suitably qualified financial advisor and discuss your overall financial situation. Now that you have a lump sum available care must be taken to make sure that all your needs are catered for, such as your monthly cash flow requirement, accommodation, retirement provision, holidays and so on. And, as I mentioned earlier, please make sure your will is up to date and structured in a way to protect your daughter.

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I incorrectly referred to Capital Gains Tax in the second paragraph under the heading “Avoid Capital Gains Tax”. Donations tax will apply to amounts gifted above R 100 000 per year. CGT will apply when the investment is cashed in some time in the future. This is where a TFS makes a lot of sense since no taxes will be payable by the owner of the TFS.

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