We have all heard the phrase: “It’s not about timing the market, but time in the market.” One of the most important lessons parents can teach their children is the value of money – how to really understand the dynamics around investing and how to make money work for them. This helps ensure children learn about financial freedom from a young age so that they can spend their precious time doing what they like and need, rather than doing things to earn money.
This is no easy task, as we live in a society where everything seems to have a price and is instant and disposable, and where money is not necessarily valued.
There are two popular investment vehicles to save for your children’s future, namely tax-free savings accounts (TFSAs) – and retirement annuities (RAs).
As you can see from the table below, the two products have different benefits and are therefore suited to achieving different goals.
| Retirement annuity | Tax-free savings account | |
| Is tax payable within the portfolio? | x | x |
| Are contributions tax deductible? | a | x |
| Do investors have access to funds at any time? | x | a |
| Does the investment need to comply with Regulation 28 of the Pension Funds Act? | a | x |
| Are there limited underlying investment options? | x | a |
| Are contributions limited over the product lifetime? | x | a |
| Is the product subject to 37C of the Pension Funds Act? | a | x |
| Can beneficiaries be nominated? | a | x |
| Is the product subject to estate duty on death of the investor? | x* | a |
| Is the product subject to executor’s fees on death of the investor? | x* | a |
*Provided a beneficiary has been nominated
Tax-free savings accounts (TFSAs)
You can contribute to a TFSA on a monthly basis and also make ad hoc payments from time to time. The flexibility this offers means that this product is often used as a savings vehicle to contribute towards a child’s tertiary education. However, you need to be aware although any person (including minor children) can invest in this product (and even have more than one TFSA), the annual limit that an individual can contribute to TFSAs per tax year is R36 000. There is also a lifetime contribution limit of R500 000 per person. Once you reach the maximum contributions allowed, you can however continue to make contributions to another savings vehicle like a voluntary investment.
Retirement annuities (RAs)
The power of compound interest and growth help ensure that you can make a meaningful contribution to a minor child’s financial freedom when they reach retirement age. For example, as a parent, you could make contributions to a retirement annuity in their name. There is no tax deduction that you can make use of in such a scenario, but one of the benefits of investing into an RA is that it encourages parents (and their children) to maintain a savings discipline.
Once your child starts to earn their own income, and can take over the contributions, the normal retirement fund rules will apply in terms of the deductibility of contributions and access to retirement funds.
Opening an investment in a child’s name will help educate them about retirement planning, and there is no better way of doing this than them watching their own investment grow. When they are a little older, you can encourage them to contribute some of their pocket money or birthday money into their investment. In this way, you not only teach your child about financial planning, but are also giving them a head start!
Here is what the numbers say: If you invest R500 per month, escalating at 6% per year for 18 years (and assuming a growth rate of 10%), the balance will be R427 819 after 18 years.
If you stop contributing when your child turns 18 and leave those funds to grow, when they reach the age of 55, those funds should be equivalent to R14 547 515.
However, if your child decided to continue contributing to this RA when they reach the age of 18 (assuming a contribution amount of R1 500, escalating at 6% per year, and a growth rate of 10% per year), the value will be around R26 581 386 when they reach 55. In today’s terms, that is just over R3 000 000. This is the benefit of making use of the products available at your disposal in the best way possible.
Having a savings strategy in place, assists with decision-making. When it comes to family and friends wanting to spoil the children with presents for birthdays and Christmas, why not suggest that a small portion of what they were going to spend be invested… the numbers will tell the rest of the story!
One thing is for certain, you will never regret that you planned for your retirement and that you have the privilege of retiring comfortably, and your children will be incredibly grateful. Hopefully, they will do the same with their children and, slowly but surely, we will change our nation into one with a better savings culture.
Robyn Laubscher is an advice and product specialist at PSG Wealth.
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