Which investment vehicle is best for our children?

Our options are tax-free savings accounts, retirement annuities and endowment policies.

Through Devon Map

Dec 15 2020 00:04

I got married in September. My wife and I have four children from our previous marriages. We are fighting to choose an investment vehicle for our children. My two children (aged two and three) have tax-free savings accounts, while her children (aged five and 11) have educational policies, which I am against. What is the best option for our children: the TFSA or retirement pensions or endowment policies?

Thanks for your question. In writing this answer, I assumed that the investment horizon for these investments is long term – either to use for their higher education or to invest in a car when they turn 18. In order to provide a complete answer, I will briefly outline how each of the suggested investment options work so you can determine if they will be of benefit to you.

Retirement pension

While contributions to a retirement annuity are tax deductible, deductions are only deductible in the hands of the owner of the retirement annuity. This means that opening a retirement pension in the name of your children would not result in any tax benefit. In addition, the investment strategy would be limited by Regulation 28 of the Pension Fund Law which limits foreign exposure. In addition, your children will not be able to access retirement pension funds until they are 55 years old.

Staffing policy

Endowments are policy-wrapped investments that have a restriction period of at least five years. There are no rules governing the investment strategy you can invest in and while there are some rules to allow some access to funds even during the restriction period, the main benefit of the endowment policy is is the tax rate applicable to the investment. Endowments are taxed at the flat rate of 30%. This means that if an individual is in a tax bracket above 30%, an endowment policy will make financial sense because the applicable tax on earned income would be at a lower rate than a normal investment in a business. trust, while having a lower effective tax rate on capital gains tax.

Tax Free Savings Account

A Tax Free Savings Account is exactly what is written on the box. This can be a linked money market / cash account or an investment that grows tax free and is not subject to any capital gains tax on withdrawal. It is important to note, however, that contributions made to a Tax Free Savings Account are not tax deductible and that individuals only have a contribution limit of 36,000 Rand per year.

Considering the three investment structures above, if the idea is to invest the money on behalf of your children and have the funds invested for the long term, it would be a good idea to use a savings account. tax free for them.

Depending on the platform you are using and the funds available to them, you would have complete flexibility in choosing how the funds are invested and have no restrictions on offshore or equity exposure. The main advantage would be the tax benefit. No interest or dividend tax can, over a long investment period, lead to better returns. No capital gains tax on the withdrawal is also a benefit of the TFSA, especially if the funds have been invested for a long time and have grown significantly.

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