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A News24 reader looks to an expert for guidance on the best investment vehicles for each of her children. She writes:
I am a parent of four children, the youngest being 11 and 12 years old and the oldest being 22 and 25 years old - they are not working. I have a few investments in my name, i.e., a tax-free savings account and shares portfolios. However, I would like to invest for my children individually and am seeking guidance on the best investment vehicles I should use. Currently, I have manageable debt, with my mortgage being the highest, with a R300 000 balance owing.
Debbie Ryan, certified financial planner at the Financial Coach responds:
The reader does not mention why they would like to invest for their children.
But I will say it is admirable to want to provide a sum of money to one's children, and in a perfect world, it would be nice for a young adult to start their lives with a lump sum.
However, a lump sum such as this is not necessary; additionally, if it is at the expense of the parent's finances, it is certainly not worthwhile.
Ultimately, the child will have to take care of their parents should they not have made adequate provisions for their retirement. This reader mentions they have debt and a bond. Debt is expensive; my primary recommendation would be to pay off the debt before embarking on any savings for the children.
The type of investment for the children depends on when the reader would like the children to receive the funds or what the investment term would be. Assuming the older children would need to receive their funds in a short period of time, such as one to two years, I would recommend accumulating the older children's funds in a good money market account.
As the term of the investment is short, it is not a good idea to subject the funds to the risk of market fluctuations by investing in equity-based unit trusts or share portfolios. Assuming the younger children would have a longer investment period, I recommend looking at a good passive unit trust or an ETF fund. Passive and ETF funds have low fees with the added benefit of there being many good funds to choose from.
A popular choice for parents implementing investments for their children seems to be Tax-Free Savings funds (TFSA).
I am not so sure this is a good idea. There is currently a lifetime limit of R500 000, which may be invested in a TFSA; should any funds be withdrawn, they may not be reinvested.
The temptation to dip into the children's TFSA over the years is high, which could then leave the children with no TFSA investment option later in their lives. When looking to implement investments for children, the investments can either be set up in the children's names or the parent's name.
When implementing an investment in the child’s name, once the child reaches the age of 18, legally, they will have full access to those funds to do with as they please.
The other option is to create an investment in the parent's name to be given to the child when the parent feels the time is right. The funds could then also be bequeathed to the children in their will. Either way, it is good to be aware of the R100 000 per annum donations limit; anything over this amount given/donated to the child (or anyone else) could be subject to donations tax. This amount can be increased to R200 000 per annum if a married couple are saving towards the children's investments.
Questions may be edited for brevity and clarity.
Disclaimer: News24 cannot be held liable for any investment decisions made based on the advice given by independent financial service providers. Under the ECT Act and to the fullest extent possible under the applicable law, News24 disclaims all responsibility or liability for any damages whatsoever resulting from the use of this site in any manner.
