JOHANNESBURG — The world of investment is complex enough, and when it comes to thinking about saving for your children or grandchildren you may be left with a bigger headache. But there are a few key options – including tax-free savings – that parents, guardians and grandparents should be looking at seriously. In this podcast, Brenthurst Wealth’s Magnus Heystek Jr provides some advice on where to start. – Gareth van Zyl
This special podcast is brought to you by Brenthurst Wealth. Today we’re talking about investment options for children and with me on the line from Johannesburg is Magnus Heystek Jr, who is a certified financial planner at Brenthurst as well. Magnus now, tax-free savings in particular are very much the talk of the town when it comes to investment options for children. Is this the best investment option or are there other options on the table that parents, guardians, and even grandparents should be considering?
Firstly, thank you for having me, and to dive straight into the question – in terms of the tax-free savings account, as the name implies, all of the growth within the investment is tax free. So, in terms of your capital gains there’s no tax payable on the interest and there’s also no dividend on income tax payable. In particular for children, in my view, is one of the best options that is currently available on the market. Purely based on the fact that children have a much longer timeframe to invest, they can take more risk and, at the end of the day, the benefit that will be derived not now but in 15 – 20 years down the line when they might potentially need that capital for their studies and other purposes. They will have quite a substantial amount available to them but will have no tax implications when it’s time to withdraw that capital. In my opinion, there are lots of options but from a pure tax point of view and compound in interest benefit it is one of the best options available for children right now.
When should one ideally start opening up investment options for their children and how much should they ideally, be looking to put away every month? I guess that’s the million-dollar question, isn’t it?
It comes down to feasibility, I think, first and foremost. It comes down to how much parents or the grandparents can contribute and we’ll get into the tax implications in just a bit but ideally, the best scenario is to start as early as possible. The reason for that is, as I’ve mentioned, with the compound in interest – if you take that into account, over time the growth is a substantial amount. When we talk about the technical aspects of a tax-free savings account, as it stands current legislation only provides a contribution of about R33.000 per tax year that can be contributed without any penalties. If you contribute above that amount you or your child will be taxed 40% for the first Rand above that R33.000 limit and the life time contribution into a tax-free savings account is R500.000. If you take those factors into account it will take an investor about 15 years to reach the full life time contribution.
Should that then be a serious option that parents should be looking at?
Definitely. Obviously, if you look at the amount on a monthly basis it’s about R2.750 or parents can make the decision to contribute a lump sum once a year of about R33.000. Obviously, it is a significant amount for many people but if you look at the objectives behind that investment and taking that decision for the benefit of your children in the future. In most case, they might have a nice amount when they start their studies for varsity or if they need a first car when they’re about 18 – 21. There will be a sizeable amount that might be available to them.
What about looking at other options that contain higher risk? Do you think that parents, guardians, and grandparents should be looking at that as well?
Definitely. As I’ve mentioned, children have a much longer time-horizon for their investment and because they’re so young they have the ability to take a much larger degree of risk in their portfolio. When we deal with a lot of clients who approach us and they might be 5 or 10 years away from the time, they cannot really take the same type of risk because their capital has to be protected. Typically, you would go into investment options where the risk is extremely lower. That typically is what is higher allocations or cash bonds, for example, and lower equity exposure. But for children they can have an equity portfolio that can be diversified locally as well as globally and they can take a lot more risk because they have time for their portfolio to recover in terms of the reciprocal performance of equity markets, locally and globally.
Amid the political uncertainty and noise in SA, should parents also be looking at more offshore investment options for their children?
That’s a very good question and it comes down to the political spectrum. Not just from a local point of view but from an overseas point of view as well. We typically do look at market indicators and what the best position is for portfolios in general. But we would definitely recommend that any type of investment for children should have a reasonable amount of offshore exposure. Not to say that we’re directing investment away from the market. We do have a lot of shares on the market that have performed very well and it comes down to how you diversify the portfolio. As the saying goes, don’t put all your eggs in one basket and the same does apply for children and their capital.
What do you make of the more passive investment strategies out there, the likes of ETFs, smart beta funds, etcetera? Do you think that these could be part of the mix as well when considering an investment strategy?
I definitely feel that a blend of, between asset managed funds can benefit the children because you’re basically getting firstly, if you go on asset management side, you’re getting fund managers who have a bit more control on the direction of the capital in the portfolio. Typically, we’re seeing with asset funds they are cheaper but they are at the mercy of the market and it comes down to an advisor or someone providing advice on where the best position is to place the capital. I think it’s a long running argument in the industry that between asset and passive management what’s the best option but if you’re looking at it from a pure fee based point of view then an asset managed investment would be better. I would still recommend getting advice on what are the best ETFs to use so, it’s not just a matter of just saying, ‘just put all your money into one ETF.’ I still believe that a degree of diversification can come in any time.
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Interesting, and just looking at all the tax implications. I know that you’ve spoken about some of the tax-free investment options but what are some of the other tax implications that one needs to consider when donating money to your children or in relation to income tax for children’s investments?
That’s a very good question and I think it’s a very important topic to discuss purely based on the fact that there are different tax implications purely from the parent’s side of view and, also the grandparents’ side of view. Now, if you talk about donations tax first off, any taxpayer had the ability to donate an amount of R100.000 without incurring donation tax. As soon as you go over that amount there’s a tax rate of about 20%. When the parent donates to the children as an investment they need to be careful because all of the capital gains tax, interest, and dividends, will be taxed in their hands for the duration of that’s child’s investment, until they turn 18. Once the child turns 18, then the tax implications will change to the hands of the child.
Finally, for those who are looking to kickstart investments for their children. What brief advice would you give them?
Just do your homework. I know it might be a bit of a cliché to say that but there are lots of options in the industry but a good source of information is family and friends. Ask your family and friends have you got any investments for your children? Have you approached an advisor? Have you spoken to someone? What did you do? If that doesn’t work there are lots of advisors in the industry that do specialise in these types of investment strategies for families, in general. We’re not just talking about the children but the parents, and the grandparents and they can provide you with a more holistic approach. Parents also need to make sure that they are investing in structures where there’s a high degree of security and what I mean is that you have to make sure that while the [??? 0:09:37.3] is funded they’re using are registered with the SSB and that everything is above board. At the end of the day, you need that degree of security with any type of thing.
Magnus, are you also seeing more grandparents getting involved in investment for grandchildren?
Yes, we are. We see it a lot when the first child is born the grandparents could provide a gift for their grandchild and they invest it. We have had cases as well where we assist the grandparent to invest the money on the children’s behalf. Sorry, I just want to come back to the tax point as well. When a grandparent donates money to a minor that also changes the tax situation a bit because in that case, the minors are then liable for the tax, on the income and growth, which is also something that they need to take into account. As I mentioned earlier, if a parent donates the capital – the tax is levied in the parent’s hand but if grandparents or aunts or uncles donates money to a minor then the minor will be liable to pay the tax. That does make it a bit more tricky so, they have to just take that into account.
Very interesting. Magnus Heystek Jr thanks for talking to us today. It’s been a fascinating discussion.
Thank you as well, thank you very much.
All right, and this special podcast was brought to you by Brenthurst Wealth.