Tax-free accounts a better way to save for education than an endowment policy

SOUTH Africans are among the most indebted people in the world.

Many of us are “just winging it”, living from pay cheque to pay cheque, and not enough of us are investing in the future – particularly for our children’s future.

With debt swallowing up 73% of household income, according to the South African Reserve Bank, consumers are not putting enough into long-term investments.

Although South Africans are feeling more optimistic about the economy this year and trying to cut costs, according to the latest Old Mutual Savings & Investment Monitor, which was released on Wednesday (see not enough parents are saving for their children’s education.

National Treasury introduced tax-free savings accounts in 2015 to encourage saving, and they are one of the best ways to invest for the long term – particularly for your children’s education.

The best time to start saving for their education is before they start school, so your investment can benefit from the power of compound interest. Although endowment policies offered by the life assurance companies were once punted as the best vehicle in which to save for a child’s education, financial advisers are increasingly turning towards tax-free savings accounts for this purpose.

Policies branded as “education plans” by the life companies were essentially endowment policies.

Graham White, an independent financial planner, says once taxfree investments became available, endowment-based education plans became less favoured.

All the proceeds from a taxfree account are non-taxable. You may not contribute more than R33 000 a year to these accounts, to a maximum of R500 000 in your lifetime, although your capital including growth can exceed

R500 000.

“An endowment policy’s growth is taxed internally at 30%, while a tax-free plan is not, nor is it taxed at withdrawal. An endowment policy has a minimum term of five years, and there are penalties for early withdrawal.

“Tax-free plans have no minimum term or earlytermination costs. And for a unit trust manager fund to be registered for use inside a tax-free plan, they are not allowed to charge performance fees.”

Endowment-based education plans do have rider benefits, such as a waiver of premiums on death or disability, which is a small life and disability policy that is added to the plan. If a parent or guardian dies or becomes disabled, the life company takes over the premiums until the maturity date.

“This ensures funds are available to the child even if something happens to the parent,” he says.

Since there is no such protection with a tax-free account, White advises that parents have a separate life policy in place to pay a lump sum in the event of death or disability that will be earmarked for their children’s education.

georgina.crouth@inl.co.za