A guide to set up an education savings plan for your grandchild
A good education is more valuable than ever. If you're a grandparent (or even a godparent, aunt or uncle), setting up a savings plan for a child’s education is one way to leave a legacy and giving them a financial head start.
Taking an active part in shaping your grandchild’s life can be hugely satisfying. With school and university costs rising fast, early planning can make all the difference. Even small contributions can grow significantly over time, especially when placed in the right investment vehicle.
If you decide to provide support, there are several options available to you, including paying for school fees and helping with the costs of uniforms, sportswear, textbooks, stationery, transport, lunch, extracurricular lessons, pocket money and accommodation.
This article will look at how you can set up a savings plan for education for your grandchildren’s future.
Start saving for education as early as possible
A new baby brings lots of excitement (and expenses), from nappies to medical bills, and education comes at a hefty price.
What could be far more helpful and become an impactful gift in the long-term is to set up a savings fund for the child’s education.
Even if you start small, starting early will enable you to grow the fund significantly over time and to contribute to what will ultimately be the parents’ biggest expense. This is where time is on your side because the earlier you start saving the greater the effect of any interest earned on your savings and investments for your grandchild.
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For example, if you save just R200 per month from the time your grandchild is born and it earns 6% interest per year, you could build a lump sum of over R77 000 by the time they turn 18, thanks to something called compound interest. That could go a long way towards their education or future goals. |
Plan for the rising cost of education
It’s no secret that the cost of education continues to climb each year, not just school and university fees but also everything that comes with it, from books and devices to accommodation and internet access. This makes it harder for many families to access quality education without additional support.
As a grandparent, any contribution you make towards your grandchild’s education can go a long way in helping them achieve their dreams. Whether it’s covering school fees or simply helping with extras such as uniforms or transport, your help matters.
You don’t need to cover everything; whatever you can contribute counts. To keep up with rising costs, consider increasing your contribution over time. For example, if you're saving monthly, you could aim to add a little more (i.e. R50) every year to outpace inflation and give your grandchild the best chance at success.
Choose the right investment vehicle
When it comes to saving for your grandchild’s future, there’s no one-size-fits-all answer: it depends on what you hope the money will help them achieve and what you’re realistically able to contribute without putting pressure on your own finances.
Start by thinking about what the savings will be used for: is it a small gift that grows over time or a more significant lump sum for something such as university tuition? Also, consider when you want them to be able to access the money. Some accounts allow for flexible withdrawals (e.g. a high-yield savings or notice deposit) while others are better for long-term goals (e.g. a fixed deposit or money market account).
If you’re setting aside something small monthly, say R250, a fixed or notice deposit account can help your money grow at a steady, guaranteed pace. If you have a larger amount to put away, a money market account may offer more competitive growth with fewer top-ups needed.
Just keep in mind whose name the account is in: if it’s in your name and something happens to you, it becomes part of your estate, which can delay access. There are also options such as unit trusts or tax-free savings accounts (TFSA), but it’s important to understand the conditions (for example, only one TFSA allowance per person) and consult with a licensed financial advisor to make the best decision for you and your grandchild.
Tax-free savings account
A key savings mechanism that many South Africans don’t use is a TFSA. The main advantage of this type of account is that no dividends, capital gains or income tax are payable by your grandchildren, so any money you save in the account can grow faster than in a regular savings account.
To open one for a grandchild, you’ll need their ID. Note: the funds become legally theirs at 18, so it’s wise to have conversations about responsible use.
There are a few provisions regarding a TFSA that must be met, but if you speak to us, we’ll advise you on a financial plan that keeps you within the annual threshold amount of R36 000 and the lifetime limit of R500 000.
Unit trusts and special education funds
Unit trusts offer flexibility and the ability to beat inflation over time. You can tailor your portfolio to match your risk appetite and investment term. Some funds are even designed specifically for education goals.
However, financial planning experts say that starting to save from as early as grade 1, or even earlier, will help toward ensuring you ride out market fluctuations.
Speak to a financial advisor about the best investment vehicle for your needs.
Education fund top-ups
While there is nothing wrong with you or other family members showering children with affection in the form of money or gifts, why not encourage the family to contribute to the education fund?
Small top-ups from parents, godparents and close family members can collectively grow into something significant that can have a longer-lasting impact than a toy or a gadget they will grow out of. Consider gifting towards their savings or investment for birthdays and special occasions.
Leave a lasting (education) legacy
Thinking about supporting your grandchild’s education through your estate? While naming them as beneficiaries in your Will or setting up a trust can be one way to help, it’s important to understand the legal and tax implications that may come with this. Estates can take time to settle, and access to funds might not be immediate.
Also, don’t underestimate the value of talking to your grandchildren about money. Helping them build strong financial literacy from a young age empowers them to make informed decisions, whether they earn the money themselves or receive it as a gift.
A financial planning expert can discuss these situations with you and help you determine the best way to leave a lasting legacy.
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Disclaimer: This article is solely intended for information. It does not constitute financial, tax or investment advice or recommendation. Please speak to a financial advisor or registered financial professional before making any financial decision(s).
Standard Bank, its subsidiaries or holding company, or any subsidiary of the holding company and all of its subsidiaries make no warranties or representations (implied or otherwise) as to the accuracy, completeness or fitness for purpose of the information provided in this article or that it is free from errors or omissions.
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