Your child will thank you after you’ve taken this step

Saving for your child’s tertiary education should start as soon as possible.

Grace van Zyl.

Grace van Zyl, owner of Rynfield-based Aspire Wealth Management, advised parents to try save as soon as their child is born, as you’d contribute less on a monthly basis due to having started early.

However, she said it’s never too late to begin.

Van Zyl provided options to consider when investing in your child’s education.

She said the vehicle you choose would depend on how soon you needed to access the money, your income and income tax bracket.

These are some options:

• Endowment

This type of investment has a minimum five-year term during which time you’re allowed to make one loan or withdrawal.

The minimum monthly contribution is R150 per month, tax is paid at fund level at a rate of 30 per cent and at maturity the funds can be paid out tax-free.

The return on this investment is driven by the underlying asset allocation.

Traditional education policies are endowment policies.

This investment is suitable for people in a tax bracket of higher than 30 per cent or for investors who may not have the discipline to leave an investment for a specific goal.

• Unit trusts

These investments don’t have a specific term and funds can be accessed at any time and are normally paid out within five working days.

Minimum monthly contributions to unit trusts can be as low as R50.

There is a capital gains tax implication when you have the funds paid out, with an effective rate of about 18 per cent for the highest income bracket. The return on the investment is driven by the underlying asset allocation.

This investment is suitable for anyone, but investor discipline is required.

• Tax-free savings accounts

These investments don’t have a specific term.

Minimum contributions are determined by the institution you select.

Contributions are restricted to R30 000 per year and R500 000 in your lifetime.

A tax-free savings investment won’t be adequate to pay for the total education cost but could be used to fund a portion thereof.

The return on investment is driven by the underlying asset allocation.

This investment is ideally suited for the lower income bracket.

• Money market/fixed deposit

Money market or fixed deposit are cash investments; the interest earned is fully taxable less the annual interest exclusion.

The return on these investments is driven by the amount and the term invested.

The higher the amount and longer the term, the higher the interest rate (interest between 1 per cent and 6.5 per cent).

Because of the tax implications, this type of investment is not well suited to high-income earners.

Long-term investments in cash won’t keep up with inflation, which does not make this investment ideal for saving for education.

Van Zyl said each of the investment instruments has an underlying asset allocation (except for money market investments, which is cash).

“You could think of this as the ‘engine’ you put in the investment vehicle,” she said.

“The underlying asset allocation you choose will be dependent on the time you need before you access the funds, inflation, your appetite for risk as well as tax implications.

“For example, if you invested purely in cash, you could expect a return of between 1 per cent and 6.5 per cent (depending on the amount of the investment) before tax.

“If you invested 100 per cent in equities (shares), you could achieve returns of 12 per cent or more over a 10-year period.

“This kind of investment is high risk and you could lose a portion of your capital as a result of market volatility.”

Van Zyl said a more suitable approach is to have a diversified asset allocation where you invest a portion into the four different asset classes: cash, listed property, bonds and equities.

“This way you have downside protection when markets are bad and the chance to outperform when markets are good,” she said.

“It’s important to understand the tax implication, costs and term of the investment before choosing the most appropriate investment vehicle and asset allocation to suit your needs.”