Best education plan in South Africa?

By Lizelle Steyn

Published 6 July 2023

Photo credit: Godisable Jacob

Insurer websites are peppered with offerings of an “education plan”. You’d be forgiven for thinking it’s a separate investment product, complete with its own set of rules and tax legislation, as is the case with a retirement annuity and tax-free savings account. The truth is, since the government discontinued its Fundisa initiative, there is no special savings vehicle for this purpose - “education plan” is used to market a standard savings product to people planning their child's education. It could mean anything from a unit trust to an endowment policy and everything in-between. In other words, the same options available for any short- or long-term savings, not just education. So, how then do you choose the best education plan product for your child?

Saving for next year's school fees?

If you’re saving for a short-term goal, like next year’s school fees or any financial commitment within the next 5 years, your best bet is either a money market fund or a fixed deposit with an appropriate investment term. Walter from MyMoneyTree has a website called RateCompare to help you get the best interest rate.

Saving for your child's tertiary education?

If you’ll only need the money for your child in 5 years’ time or later - either for tertiary education or school fees - there’s the normal range of discretionary (non-retirement) products to choose from:

• Tax-free savings account (TFSA)
• Unit trust or ETF (both are collective investment schemes)
• Endowment policy

I’ve summarised the most important questions to ask about these products in the table below.

Education plan comparison

	TFSA in your name	TFSA in child’s name	Unit trust or ETF	Endowment policy
Tax-free?	Yes	Yes	No, you're taxed on income and capital gains at your personal tax rates	No, product is taxed at 30%
Immediate access to money?	Yes, but you’ll be using your own lifetime allowance	Yes	Yes	No
Minimum amount	Products available with no limits	Products available with no limits	Products available with no limits	Usually R500 p/m
Maximum amount	Can’t invest more than R36 000 per tax year	Can’t invest more than R36 000 per tax year	No limit	No limit
Risk of penalties?	Only if you invest >R36k per tax year	Only if you invest >R36k per tax year	No	Yes, some products charge penalty when you don’t keep up premiums
Costs	Plenty of low-cost products	Plenty of low-cost products	Low-cost options available	Not always transparent regarding total costs
Pays out to beneficiary in case you die?	Usually not - unless it’s an Allan Gray or Fedgroup TFSA	In case of your death, child’s TFSA continues, but new guardian gains control	No – becomes wound up in your estate	Yes - as long as you have a valid nominated beneficiary
Does child gain control at age 18?	No	Yes	No	No
				Source: gofreedom.co.za | July 2023

An endowment policy could be an appropriate education plan if your personal income tax rate is at the top end of the scale and you’re confident you’ll be able to keep up the premiums for the term of the policy. Before choosing a provider, always ask the insurer for the EAC – effective annual cost – of these policies to get a breakdown of the total costs related to the product.

A unit trust or ETF provides great flexibility with no limit on how much you invest, but you pay tax on the gains, as well as the income earned.

Most people prefer to use the benefits of a tax-free savings account. Ideally your own lifetime TFSA allowance of R500 000 should be used for your own wealth building/financial freedom plan, but if you’re worried that your child might cash in his or her education savings when turning 18, it would probably give you more peace of mind if the investment is in your own name instead of your child’s name.

If you’re teaching your child how to work with money and you’re confident that they will use the savings for the purpose it was intended for, you can open a TFSA in the child’s name. Just remember that, should you die before the child turns 18, the new guardian has the legal right to draw the money while the child is a minor. Therefore, choose the guardian well.

If the TFSA is in your own name, it will usually become part of your estate after your death, and distributed according to the stipulations of your Will but only once your estate is finalised. The exception is when you have a TFSA with Allan Gray or Fedgroup (they’ve “wrapped” their TFSA within a life policy), then the money goes directly to the nominated policy beneficiary on your death (it won’t be stuck in your estate while its being wound up).

As a parent, you're probably wondering how much you need to save. Fortunately, nowadays there are plenty of low-cost online training courses available to teach instantly usable practical skills, such as those on GetSmarter. But if your child is going the expensive route - university - Sanlam's education cost comparison gives you a good idea of what to expect.

You're doing a great thing saving for your child's education. Even if he or she decides to not go to university, that money will come in handy one day to buy the equipment, tools or perhaps even a car if needed to start working and earning money. The greatest gift is your example and the transferring of your own skills. So, don't be shy to show them how you chose an education plan and how powerful compound interest and time in the market are. May your investment grow faster than they do!