The student protests over the past few months have highlighted the high cost of tertiary education. For many, the cost of registration alone is enough to shut the door of opportunity. The SA Institute of Race Relations has reported that only 5% of South African families can afford to send their children to university. While the government may or may not decide to make higher education free, parents of young children, like myself, need to start thinking ahead to avoid being part of the other 95%.
The first thing every parent needs to consider before shopping around for a suitable product is their financial position and what type of education they want for their child. How much can you set aside monthly, or do you want to make a one-off lump sum investment? Are you looking to send your child to a public or private school? What about extracurricular classes and activities? Will you also want to save for university, and what figure should you be looking at?
The investment time frame is also important – the investment considerations for a newborn baby will be different to those for a 10-year-old.
When it comes to investments, you should look for an investment that, at the very least, offers returns that beat inflation and is low on costs (management, performance and other investmentrelated fees that might be imposed).
Some parents might want flexibility in terms of accessibility to funds. You’ll also want to pay as little tax as possible. All these considerations will have to be taken into account before you take the plunge.
When I started saving for my son’s education, my financial situation was less than ideal. I panicked that I’d started too late and that I wasn’t saving enough. I shopped around and eventually settled on exchange-traded funds (ETFs), opting to avoid a traditional education policy.
My reasoning behind choosing ETFs was mainly based on the lower cost, but I still had time to allow my investment to grow and ride out market dips so I didn’t need any investment guarantees.
Recently, a friend of mine suggested that I rather look at an education endowment policy, which might work better in terms of returns and the tax benefits. I decided to dig a little and I realised that, due to my tax bracket, an endowment policy would end up being a big cost for me and there would be no benefit when it came to tax.
Endowment policies have a tax rate of 30%, so the only people who would benefit in terms of tax are those in the tax bracket above 30%. They’re also not liquid investments and capital is not accessible for five years, although some policies do allow policyholders to withdraw partial funds.
A lot of people might opt to go for an endowment because access to funds is limited, thus making it difficult to withdraw funds unnecessarily. There are penalties that apply to an early withdrawal of funds – that is, withdrawals before the end of the five-year period. The penalty rate, usually set at about 15%, decreases the closer you get to the end of the five-year period.
Some endowment policies give members an option of making a lump sum investment or investing monthly. There are also several asset classes available to invest in, with different risk profiles taken into consideration. The same can be said for ETFs and unit trusts, except that the minimum monthly contributions can be lower for an education policy. Most ETFs or unit trusts require a monthly investment of R300 or more.
Those looking at endowment policies need to pay attention to initial costs, monthly costs and annual costs. Some costs may include an adviser’s commission, performance and admin fees, and asset management. Some companies charge these fees collectively as reduction in yield, and this is worked into your portfolio. The benefit of an endowment is that the