Should you have a policy for your child's education?
The new year period when the school, college and university year begins is often a time when parents consider starting to save for their children's education.
Given that the rise in education costs is at least three percentage points above inflation, investing at an above-inflation rate and harnessing the power of compounding is the only way to ensure you can afford your child's education or contribute to it in a meaningful way.
However, most South Africans - 55% according to Old Mutual's Savings and Investments Monitor - are not putting anything aside for their children's education.
If you are not saving, now is the time to start - the more time you have until you need the money the better, but starting right now is better than never.
"There's a policy for that" may have been the typical savings route for South Africans for many years, but with the range of choices available today you may wonder if policies still have a role.
Tax-free savings accounts, available for the past five years, are an increasingly popular choice for education savings, but there's some homework you should do before you sign up for any one of these savings options.
Do you need to commit to saving?
Signing a contract to save regularly or to tie up a lump sum for five years may help you be disciplined about saving. However, if you really need to stop contributing or to unexpectedly access the money it could cost you.
Many policies allow you to suspend contributions for up to six months or for four months during a five-year term, but if you still can't pay after this, a penalty can be imposed on your savings for reneging on the contract.
Penalties are limited to 15% of your savings and must drop each year to zero after five years, says Freek Kruger, actuarial specialist for the Investo team at Momentum.
Some policies offer interest-free loans against your savings.
It will cost you a policy alteration fee and you will lose the growth and returns while your money is not invested, he says.
Do you need advice?
You can invest without advice, but you need to choose investments that grow your money by more than inflation and avoid destroying wealth through unnecessary switching between asset classes or investments.
You also need to know which savings product is most tax efficient.
If you are not up to that, you may need advice.
Investing for education is about accumulating small amounts over the long term and you need advice over the long term, says Henk Appelo, lead specialist on investments at Liberty.
You can use an independent adviser to help you set up your own investments, but if you are saving smaller amounts you could use a robo-adviser - a website that gives financial advice such as OUTVest, Sygnia, Nedgroup's Extraordinary Life or SmartRand - or tied agents working for a life company. Tied agents typically earn commission on education savings that you make either in an endowment policy or through contractual saving in unit trust funds.
The amount of commission is regulated and based on how much you will invest over the period of the contract. Half the commission can be paid upfront to the adviser and if you renege on the contract, life insurers penalise you to recoup the commission they have already paid.
Do you need life cover?
Life cover is for when things don't work out the way you expect. Policies may or may not include life cover or a premium waiver benefit.
Life cover, like Liberty's EduCator benefit on its Education Builder policy, could, if you die or become disabled or critically ill, cover the costs of your child's education to postgraduate level regardless of what you were saving, says Appelo.
If your education policy has a premium-waiver benefit, in the event of death, disability or even, with some companies, retrenchment, your contributions are paid, allowing you to reach your savings goal, but not necessarily ensuring you have enough for your child's education.
If you don't want to save in a policy, you can take out your own life cover and may even be able to buy a benefit like the one on Liberty's education policy.
If you don't have such a benefit, you need to make sure your life cover is sufficient to cover the ever-increasing cost of your child's education should you die or become disabled.
Life cover is typically offered with annual increases in the cover, fixed or inflation-linked, but making ad hoc increases to your cover when you are older could result in a sharp increase.
However, if you are saving only small amounts, education policies may offer life cover at premium levels that you cannot access on a standalone basis, says Marius Pretorius, proposition manager at Old Mutual.
The lowest standalone life assurance policy is about R200 a month, he says, but it may cost substantially less to insure yourself against losing the ability to contribute to your education savings.
Can you save on tax?
Life companies' endowments can save you tax if you are paying tax at a marginal tax rate of more than 30%.
If you earn more than R305,000 a year, the rate of tax you pay on your earnings above this amount will exceed 30%.
In endowment policies, the assurer pays the tax at 30% and you do not have to pay tax when the proceeds are paid to you.
Life assurers offer these endowments with the flexibility to stop or change the amount you contribute and to withdraw or borrow against your savings up to certain limits if you need to.
Old Mutual, for example, offers such a plan with life cover you can stop and start as you need it and withdrawals are restricted, in line with legislation governing endowments, to 20% of what you have saved each year, Pretorius says.
Kruger says flexible plans may have higher minimums than less flexible contractual savings policies and may not include life cover.
Not all contractual savings plans are endowments - check before you sign up if saving on tax is your aim.
If you are a lower earner, the tax rate in an endowment policy will be higher than what you pay if you invest in your own name. Appelo says on smaller amounts the tax is modest. However, getting appropriate advice can make a real difference in your life and the lives of those you are saving for, he says.
If the policy is an endowment you can name a beneficiary and, should you die, the payout will go to that person. The amount paid will still go into your estate and attract estate duty if your estate is more than the exempt amounts (R3.5m or potentially R7m for the second-dying spouse), but you'll save a little on executor's fees, Kruger says.
If you set up your own investments in a tax-free savings account, you will pay no tax on the interest and capital growth.
Remember there are annual limits (R33,000) and life-time limits (R500,000) to how much you can contribute to a tax-free savings account, but no limit to the account's growth.
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