Parents can learn a lesson
Education is expensive. It can range from anywhere between R230,000 to R3.2m after tax, depending on the schools, and given the current economic and political environment, it could become even more expensive.
Now, more than ever, parents could benefit from thinking ahead and opening a tax-free investment account to help in paying for their children’s education.
According to Donna Barnes, product owner for tax-free investments at Nedgroup Investments, tax-free investments, which are a government-supported savings vehicle designed to encourage South Africans to save more, are ideal for parents preparing to pay for a child’s education.
“Investors are able to invest a relatively small amount and take advantage of the medium to long-term benefits of compounding, without paying any tax on interest, dividends or capital gains. The additional tax savings these investments offer can also add up and compound over time — growing into a substantial investment that can go a long way in covering education costs,” she explains.
To illustrate that a tax-free investment is a “no-brainer”, Barnes explains that if you stick to the monthly discipline of saving your full R33,000 taxfree savings allowance for five years in a low equity balanced fund, your R165,000 contribution can be worth just over R200,000 or, over a 10year period, your R330,000 contribution can reach to just over R500,000.
“In addition, you are not subject to any capital gains tax at withdrawal and you will be able to put the full expected value in your pocket, unlike withdrawing from a normal unit trust investment.”
Education is one of the most formative influences in a child’s future. However, with debt levels so high and financial pressures on the rise, many South Africans only realise the extent of the cost of education once a child starts school — and this then adds to the financial burden of a household.
With tax-free investments, investors can invest as little as R500 per month and take advantage of the tax savings.
“Tax-free investments, if used wisely, can have significant and positive longterm financial consequences. The key is to start contributing as soon as possible — and to try to contribute the maximum annual allowance to get the full benefits over time,” says Barnes.
Furthermore, she says that tax-free investments are flexible so, should the money be required in an emergency, it is possible to access it.
“It is also possible to open up a tax-free investment on behalf of a family member or a child. This way, when the child turns 18 and takes over ownership of the investment they could have a substantial investment that enables them to start their lives without soliciting enormous debt,” she adds.