Question:
I'm looking for the best way to invest money for my five-months-old daughter.

What policies or savings accounts are available?

Answer:
Bringing a child into this world can be the most humbling yet rewarding journey you could possibly hope to experience in your lifetime. From the moment your newborn is first placed in your arms your view of the world is turned on its head and you begin to look at the future with renewed clarity and purpose. Somewhere inside you an instinctual switch is flicked and your goals, dreams and priorities take on a new look as you are moulded into a new role ? that of a parent, provider and nurturer.

But through all this you can?t ignore the questions regarding the financial responsibility you have just taken on and the practical implications this may have. Don?t misunderstand ? the role of provider is as evolutionary and strong as any of the other instincts. It?s just that the measure of our success as providers is largely achieved by making some practical and informed decisions.

When deciding where to invest money for your child you need to answer an important question: what is the money destined for?

Essentially, a major reason parents take on the decision to invest is to secure a private and/or tertiary education for their child or children. The advent of education policies was brought about by parents wanting to set money aside for tertiary education and was predominantly 'housed' inside a standard endowment policy.

This made sense because time was on your side and the premiums were not ridiculously onerous. As an example: should you wish to fund a four-year university degree and you start saving from your child?s birth it would result in a premium of around R1050 per month. This calculation assumes a 10 percent growth rate and premium increases of seven percent. If this is your goal then by all means you could look towards this strategy as your solution.

If, however, you are looking to fund private school tuition then the discussion needs to take on a new angle. Using a similar example as above, and assuming annual fees of R45 000, the benefit of time reduces to a mere six years. Having just six years in which to raise the required capital, the monthly premium will need to be somewhere in the region of R7500 per month ? something I am sure a new parent's budget will not be able to survive.

Of course if we decided to rather start saving now and continue our savings throughout the child?s school years then the premium lowers somewhat to a more manageable figure of around R2700. But does it make sense to fund an education policy through the term of tuition and incur all the costs of a policy if all I am going to be doing is withdrawing at a faster rate than saving? Probably not.

So where does that leave us when it comes to school costs? The most prudent way to do this is to find out what the fees are at the school you plan to send your child to and then set an amount aside in your budget each month to cater for this. This will ensure that other lifestyle expenses don?t begin eating into this money, something that is hard to reverse later down the line. This will also allow you to build up a reasonably substantial amount to fund other extras such as school trips, uniforms, sports equipment, etc.

But where do you put it? Well these days you may select between an endowment, unit trust, LISP (basically an administrative platform with access to a variety of unit trust funds) or even choose from a number of savings accounts. Unfortunately there isn?t an exact answer for what investment vehicle would be perfect for your savings. The investment vehicle landscape is complex and designed to address very specific circumstances for each person?s individual needs. But to interpret it broadly, there are essentially three key differences between these vehicles.

Firstly, there is the matter of what instruments your money will be invested in. Endowments, unit trusts and LISPs can invest in anything from pure interest bearing instruments to equities. It all depends on the fund you go into. With savings accounts, fixed deposits and money market accounts (available from all four major banks) growth is limited to interest earned which varies according to prevailing interest rates.

Secondly, from a liquidity point of view, restrictions will only apply to an endowment policy and perhaps on certain fixed deposits (e.g. a 36-month fixed deposit). The Long Term Insurance Act specifies that a policyholder in an endowment may only have two access points to the money in the first five years, namely one loan and one surrender.

Lastly, when considering tax, personal circumstances are critical for selecting the correct vehicle. Endowments are taxed according to the four fund approach where all tax is paid by the fund during the policy term. So an endowment therefore pays out net of tax ? not 'free' of tax. The fund is taxed at a flat rate of 30 percent of all net rental income and interest and 7.5 percent on capital gains. All the other vehicles mentioned are taxed in your hands at your personal marginal tax rate. Certain income tax exemptions are applicable (an interest exemption of R19 000 for if you're younger than 65 or R27 500 for those older than 65 and R16 000 Capital Gains Tax exemption per annum).

So, although the principles may be easy to understand, choosing the correct investment vehicle could become trickier and therefore may require the services of a Certified Financial Planner.

Best of luck.

? Have you got a Personal Finance question? Click here to ask our experts.

? If you would like acsis to put you in touch with an independent financial planner, click here!