Most families are stretching their budgets in order to make the festive season memorable for their children, within the constraints of soaring living costs and concerns about what the New Year may bring. Shiny toys, which can soon break or be outgrown, are often the gift of choice; and certainly, as stocking fillers, they can add a lot of colour and fun.
However, when it comes to bigger-ticket expenditure, it’s well worth considering a financial gift instead. While a present of money may seem unimaginative, when carefully chosen, this can be of inestimable value in the years to come.
Grandparents could, for example, establish a money market account for a grandchild whose birth is imminent. This could also serve as a useful cushion to cover initial expenses, and prevent young parents from falling into debt.As the baby matures, and if funds are limited, an old-fashioned piggy bank, or a glass jar containing some coins or notes, will help the child visualise how money grows.
Time is another gift that cash-strapped grandparents can give, says Shafeeka Anthony, Marketing Manager of JustMoney.co.za, a website that assists South Africans to make the most of their finances. “Start a conversation from an early age about how money can grow, show a child how you manage your own spending, and you will pass on valuable financial lessons.”
When considering savings and investments for a child, do your homework first, Anthony recommends. Selecting an investment, she notes, is similar to planting a seed, in that you need to choose the seed carefully and provide suitable conditions for optimal growth. “Considerations include how much risk you are prepared to take, as this will influence returns. Investments also have tax implications. It’s worth discussing options with your bank manager or personal financial adviser.”
JustMoney has accrued advice from several finance professionals regarding investment options when planning your child’s future.
Bullion Krugerrands: Farzana Botha, segment manager, communications and marketing at Sanlam, says the simplest financial gift is Krugerrands. These coins can be purchased from your bank or an authorised coin dealer, and are the easiest and cheapest way to invest directly in gold bullion. Their value is linked directly to the rand-dollar exchange rate and the dollar gold price, so you’ll always know what your investment is worth.
Tax-free savings account in the child’s name: Botha says, “This type of account has a R36,000 annual contribution limit, and a R500,000 lifetime limit. If you materialise that limit early on, the compound interest can almost triple the amount gifted over a 16-year period.”
Neither the income nor the capital earned will be taxed if the investor remains within the specified thresholds. However, the funds can be accessed at any time, which may be a temptation.
Unit trust accounts: A unit trust pools account-holders’ money, and invests it in shares, bonds, money market instruments, and other assets. Botha says these are a solid choice for children, especially as their inflation-beating performance suits informal education funds.
“You can reward the child for milestones reached by adding small amounts to the account,” Botha says. “Unit trusts can be accessed at any time; however, they do attract tax.”
Investment account: Investments are riskier than cash, but given that time is on their side, these could pay off with higher profits. Thembeka Khumalo, senior client experience manager at Satrix, says SatrixNOW clients can open an investment account for their minor children and start investing from as little as R10. Both unit trusts and exchange-traded funds are offered on the platform.
“These are flexible and offer diversification by giving the investor exposure to a group of equities, market segments or investment styles,” she says.
Education plan: This is usually an endowment policy that matures after a set period, such as five years. They are safe investment vehicles as pay-out on maturity is guaranteed, and there are penalties for early withdrawal, which reduces temptation.
It’s worth investigating the costs before purchasing, however, as this product can be pricey. Growth on these policies is taxed at a flat rate of 30% – an advantage if your tax rate happens to be higher.
Tax implications
Cheryl van Rooyen, a certified financial planner at Efficient Wealth, says gifting investments can be complex, as it occurs in the context of a highly-regulated industry. As a rule of thumb, make sure the gift does not exceed the annual donations tax exemption of R100,000 per taxpayer.
“Anything above this will be subject to 20% donations tax and must be disclosed to the South African Revenue Service (SARS),” van Rooyen points out. “A crucial factor is the name in which the investment has been registered, as there may be implications if the giver passes away. The investment can be made in the child’s name, but that child may be ineligible to access it without the consent of a guardian, unless they are 18 years of age.”
Before purchasing a product, van Rooyen says, it’s important to consider likely taxes on contributions, maturing investment proceeds, or future withdrawals, as this can have an impact on your financial affairs.
Anthony concludes, “It’s never too early to start planning your child’s financial future by saving and investing. Your child will benefit from the power of compound interest – meaning, interest accrued on interest – if you start the investment when they are young.
“The value of a financial gift will become apparent when an investment matures, and the young adult has the funds to take up options such as tertiary education or a deposit on a flat.”
