South Africans are among the most indebted in the world. Many of us are “just winging it”, living from pay cheque to pay cheque, and not enough of us are saving for the future – especially investing in our children’s future.  

With debt swallowing up 73% of household income, according to the South African Reserve Bank, consumers are not putting enough into long-term investments.

And while South Africans are feeling more optimistic about the economy this year and trying to cut costs, not enough parents are saving for their children’s education, according to the latest Old Mutual Savings & Investment Monitor, which was released last week.

Tax-free savings accounts were introduced in 2015 by Treasury to encourage saving behaviour and it’s one of the best ways to invest for the long term – especially your children’s education.

The best time to start saving for education is before they even reach school, to benefit from compound interest. And while endowment policies offered by the life assurance companies were once punted as the best vehicle in which to save for your child’s education, financial advisers are increasingly turning towards the tax-free savings account to save for this purpose.

Policies branded as “education plans” by the life companies were essentially endowment policies.

Graham White, an independent financial planner, says once tax-free investments became available, endowment-based education plans became less favoured.

All proceeds from a tax-free account are non-taxable. In these accounts you may not contribute more than R33 000 a year, to a maximum of R500 000 in your lifetime, though your capital including growth can exceed R500 000. 

“An endowment policy’s growth is taxed internally at 30%, while a tax-free plan is not, nor is it taxed at withdrawal. An endowment policy has a minimum term of five years, and there are penalties for early withdrawal.

“Tax-free plans have no minimum term or early-termination costs. And for a unit trust manager fund to be registered for use inside a tax-free plan, they are not allowed to charge performance fees.”

Endowment-based education plans have rider benefits, such as a waiver of premiums at death or disability, which is a small life and disability policy that is added to the plan. If a parent or guardian dies or becomes disabled, the life insurer takes over the premiums until the specified maturity date. “This ensures that there are funds available to the child even if something happens to the parent,” he says.

Since tax-free plans don’t have specified terms, payments into the investment are likely to cease on death or disability, so he advises parents to put a separate policy in place to pay a lump sum into the account for their children’s education.