Saving for university
The exorbitant costs of attending a university in South Africa means that for many parents planning the options for their child’s tertiary education, this route is simply not a financially viable one.
Higher Education and Training Minister, Blade Nzimande earlier in the year highlighted that many universities have levied annual fee increases well above year-on-year inflation.
Declining government funding for higher education has been blamed for this, but the end result is that a university degree is simply too expensive for a household budget which is already under pressure, explains Investec.
Saving for university
Currently, typical first year tuition fees for a student studying a straight Bachelor of Commerce (BCom) at the University of Cape Town (UCT) range from R50,000 to R62,500.
Investec said that if parents start saving early enough for their child’s tertiary education, enrolment at a South African university suddenly becomes a possibility.
According to René Grobler, head of Investec Cash Investments, the sooner parents begin contributing to an investment plan, the sooner their money can begin working for them.
Furthermore, thanks to National Treasury’s new tax-free savings initiative, launched earlier this year, that time is now.
“Treasury’s confirmation that parents can open a tax-free savings account for each of their children provides the optimal mechanism to begin saving literally from as soon as your child has an ID number,” said Grobler.
The tax-free savings accounts were introduced to help South Africans save more, over and above their retirement savings.
Customers are allowed an annual limit of R30 000, and a lifetime limit of R500 000 in the accounts.
Therefore, these accounts offer parents an excellent opportunity to save for their children’s tertiary education.
Investec explains that, for example, if a parent started contributing R30,000 per year into a tax-free savings account with a 7% fixed interest rate, before their child turns 17, they would have met the current lifetime contribution limit of R500 000.
If they left this in the tax-free savings account until their child turns 18, thanks to compound interest (at a constant rate of 7% per annum) their accumulated savings would have grown to R1,04 Million.
In for the long haul
According to Grobler, parents using a tax-free savings account to save for their child’s future should regard the investment as a long-term one.
“For clients who exercise the restraint required to leave their investment for the full term, thanks to the positive effects of compounding interest, they will reap the most benefit,” she said.
While Treasury has stipulated that the tax-free savings account offers full liquidity within 32 business days in the case of an emergency.
Any withdrawal will, however, have a minor product-specific penalty fee.
However, you will not be able to put the same amount of money back into the account once you have withdrawn it. This is because there are annul and lifetime limits on the account.
Withdrawals will therefore negatively affect the tax-free growth of the investment over time.
Also, it’s important not to exceed the annual or lifetime maximum contributions, since any amount over these thresholds will be taxed at 40%.
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