The gift of education

A Fin24 user seeks advice on the best and most tax-friendly options for saving towards her children's education. She writes:

I have two kids aged five and 18 months. 

Over the last few years, they have been receiving gifts from their grandparents and other relatives in the family. 

My husband and I have opened up their own savings account with a bank. However, we are not getting much interest on this money. 

I have investigated a few options: 

• SA retail bonds
• Unit trusts
• Shares 

All of the above are taxed! Why should this be so? 

The government is trying to get people to save, but if the SA Revenue Service is going to tax this, most of us are totally put off. 

Wynand Gouws, head: retail channel management at Old Mutual Investment Group South Africa, responds:

It is very encouraging to see the work you have done in exploring the options available to provide for your children’s education. 

The government is indeed serious about incentivising savings for education, and has introduced a product to encourage this called Fundisa, in conjunction with the Association of Savings and Investments. 

By investing in a Fundisa account, you can obtain a bonus of up to 25% of the money invested in the account per year to a maximum of R600. So, if you invest R2 400 you qualify for a bonus of up to R600 to be added to the account.

The proceeds of the investment can then be used exclusively towards education. 

It is also important to provide clarity on the other reinvestments you have considered like retail bonds, unit trusts and shares. 

As you correctly point out, these investments do have taxable components ie retail bonds and some unit trusts attract interest, and unit trusts and shares are subject to capital gains.

Both of these may be subject to tax (for example, interest is subject to income tax and 25% of capital gains is included in your income tax calculation). 

However, there are a number of exemptions that need to be taken into account. The taxability will depend on your personal circumstances. 

You could consider making your investment in your children’s names. As they do not currently have taxable income, this may be the most tax-effective way to invest for their education, without attracting tax. 

Before I conclude, I do want to reinforce the importance of generating an appropriate, inflation-beating real return for your educational savings.

Given your children’s ages, you have 13 to 15 years to invest before you need access to the capital.

This does allow enough time to take appropriate risk, like investing in a balanced fund targeting consumer price index (CPI) + 5% over time (this means targeting to outperform inflation by 5% per year).

This is significantly better than what can be achieved by investing in fixed interest investments, which over time deliver returns of CPI + 1-2%.

Providing for your children’s education can be the most important investment you make, for you and for them. It is therefore in your best interests to get professional advice from a certified financial planner.

- Fin24

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