Most families stretch their budgets to make the festive season memorable for their children. While a toy may be appealing and the gift of choice, it would be best to consider a financial gift that will pay off in the long run.
A present of money may seem unimaginative, but when carefully chosen, this can be of inestimable value in the years to come. This is according to Shafeeka Anthony, marketing manager of JustMoney.co.za.
"Start a conversation about how money can grow from an early age, show a child how you manage your own spending, and you will pass on valuable financial lessons."
Anthony recommends that when considering savings and investments for a child, do your homework first. "Selecting an investment is similar to planting a seed in that you must 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 advisor."
JustMoney has enlisted the advice from Farzana Botha at Sanlam, Thembeka Khumalo at Satrix and Cheryl van Rooyen at Efficient Wealth to look at the different financial investment options that could benefit a child's future.
Bullion Krugerrands: Botha, segment manager of 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 any time; however, they attract tax."
Investment account: Investments are riskier than cash, but given that time is on their side, these could pay off with higher profits. 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," said Khumalo.
Education plan: This is usually an endowment policy that matures after a set period, such as five years. They are safe investment vehicles as payout on maturity is guaranteed, and penalties for early withdrawal reduce temptation.
It's worth investigating the costs before purchasing, as this product can be pricey. Growth on these policies is taxed at a flat rate of 30% – an advantage if your tax rate is higher.
Tax implications
Van Rooyen, a certified financial planner at Efficient Wealth, says gifting investments can be complex, as it occurs in a highly-regulated industry. As a rule of thumb, ensure 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," 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 impact your financial affairs.
"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," said Anthony.
Questions may be edited for brevity and clarity.
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