Ask an Advisor: Saving for an unborn child’s education

by - August 15, 2016

Lauren: My question is on saving for an unborn child’s education. How much should my fiancee and I be putting away each month? I was thinking R800-R1000? I also thought an endowment would be a good idea, but my fiancé thought we should use a tax-free savings account.  What do you think?

Advisor's Answer: 

Yolande Botha - Head: Wealth Business, Galileo Capital
Finalist in the Financial Planning Institute’s Planner of the Year 2016.

Everyone who has a child knows how strongly we feel about their education. The question about how much to save depends on a lot of factors. Schools do not charge the same fee, but as an average primary school is around R 17,000 per year and high school at around R 20,000 per year. For university you can work on R 50,000 per year. So if you are saving for the whole school career and a three year university degree you can do it as follows:

- In the first five years start saving for primary school, high school and university. This debit order should be R 3,885 and must increase by 10% per year.
- In primary school only save towards high school and university. This debit order should be R 1,475, also increasing by 10% per year.
-In high school you only need to save for university. This debit order should be R 980, increasing with 10% a year.

If you follow this route it means that you will save a lot in the beginning, but it reduces substantially in later years. That leaves you with extra cash for your own retirement or additional expenses. Please keep in mind that these savings only cover school fees. Keep in mind that you also need to consider other expenses such as clothing, extracurricular activities, stationary and aftercare if that is necessary.  If you are saving R 1,000 a month you will have enough for university fees, if you increase this amount by 10% every year.

An endowment is worthwhile for someone who is paying tax at 40% as the endowment itself pays only 30% in taxes. It is unlikely that an endowment will be beneficial to a child unless they have substantial investments in their own name and is liable for tax. The tax free savings vehicles are great for children, but there are limitations and if you draw money within a 15-20 year period it decreases the benefits of this vehicle. It would be great tool to use for saving towards university fees. A good unit trust on a LISP platform is a good option to save for schooling as they are flexible and withdrawals can be made at any time without incurring any penalties.

There are so many variables in schooling fees and how we save and it is a distinct calculation for each individual. It is always good to talk to a financial planner if you are concerned about the options available.

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