It's tempting to bury your head in the sand when you think about how much you will have to pay for your child's education. It already costs at least R300 000 for 12 years at a good private school and half that for a public school. And that's before you've included the cost of uniforms, books, extramural activities and education inflation that will probably push up the costs by about 10%/year.
Then there are university fees. Last year it cost almost R50 000 for a commerce degree and more than R100 000 for a medical degree. University tuition fees are expected to at least double by 2011 and more than quadruple by 2019.
If you don't factor education costs into your overall investment strategy, you'll never be able to give your child the education that'll enable them to survive in an increasingly competitive corporate world.
But how do you go about it? Should you set up a separate investment strategy for education or incorporate it into your overall plan for retirement and other big-ticket expenses you plan to make?
Wealth Corporation MD Nigel Scott believes education funding should be factored into a holistic financial plan that includes the other important life goals such as retirement and shouldn't be boxed off as a separate investment strategy. But that doesn't mean you shouldn't give it some serious thought.
Says Scott: "Education is a critical part of setting up financial objectives, apart from paying off debt and retirement. It is one of the most significant targets, but shouldn't be compartmentalised and financed separately."
He notes that time horizons play an important role in planning. If you decide you can afford to pay for primary school fees from your monthly cash flow, you factor that into budgets over the period and have 12 years to build up the high school fees.
MacConnell Sneddon Personal Wealth Management financial planner Greg Sneddon agrees financial planning is not about events but is a process that needs to be revisited frequently.
"The biggest problem is that too many people compartmentalise their investment strategies. It makes no sense to put money into an education policy when you are still paying off debt."
Sanlam marketing brand manager Cedric Bhagaloo says people need to change their attitude towards education and education funding. He says parents need to develop a strategy that includes a policy for 18 years and short-term products for the one-off events. He believes parents should start saving for their child's education as soon as the child is conceived.
There are many ways to start saving for education bills, and you're by no means restricted to the education-branded products offered by the institutions.
In fact, financial advisers say education policies are nothing more than branded endowment policies and, as long as you understand how these work, you will be able to make a decision based on how they compare with other investment options such as a savings account, investing in unit trusts or using your access bond as a savings vehicle.
Endowment policies are a good option if you have the time because they have a minimum life span of five years. You can make one withdrawal during that period, after about three years, but it will affect the ultimate performance of the product.
Endowments are offered by all the large life companies and they recommend them as tax-efficient structures offering flexibility once the product has reached maturity because you can make withdrawals as and when you need to. Investment returns are taxed within the fund at 30% and not in the hands of the policyholder. If the investors' marginal income tax rate is higher than this, it will affect the tax efficiency of the vehicle.
Old Mutual investment products product manager Ilse de Fleuriot says Old Mutual has two types of endowment vehicles investors could use to invest for education: the Essential Education Plan; and Investment Frontiers.
The Essential Education Plan has a minimum monthly contribution of R100 and De Fleuriot says the product has been designed to offer value for money. Commission is charged upfront, so you have to pay that off during the first year of the policy's life but after that, she says, "there's an almost 100% allocation of your funds every month".
Old Mutual has kept things simple by offering two underlying investment options: the smoothed-bonus fund, which smoothes market-related returns by offering annual bonuses, and the secure fund, which is invested solely in interest-bearing assets.
The smoothed-bonus option invests 65% in equities, 25% in interest-bearing assets and 10% in property.
"The big message is diversification and splitting your risk exposure across various asset classes," she says. The smoothed-bonus policies offer more protection against volatile financial markets. De Fleuriot points out that last year the JSE lost 8% of its value but Old Mutual still declared a bonus of 3%.
De Fleuriot says the secure fund is a good parking place for cash.
Meanwhile, Investment Frontiers is a new generation sinking-fund endowment policy because it doesn't charge commission upfront, but as and when you make a contribution to the fund. It also offers greater investment choice because investors can choose from a range of underlying investments.
Another difference between the education savings plan and Investment Frontiers is that you can get international exposure in the latter, which means there's a rand-hedge element to the investment.
Investment Frontiers also offers premium continuation insurance and death and disability cover.
De Fleuriot questions whether this range of choice is necessary for an education plan.
"The essential savings plan doesn't offer you switching options, which many people don't need when they are saving for education."
She recommends using these products if you have five to 10 years.
She says it's important to start saving when a child is born and to have the discipline to build up a fund, which experiences steady growth because of the compounding effect of interest earned on interest.
Metropolitan financial and legal advisers senior manager Wessel Vermaas says the choice of instrument depends on your marginal tax rate. He says if you're paying the maximum marginal tax rate, then an endowment policy is best because its 30% tax rate is lower than your income tax rate. But if you're lower down the tax table, he recommends investing in unit trusts, with the proviso that you invest carefully and have the financial self-discipline to keep investing because you have easy access to unit trusts.
Vermaas emphasises the need to start as soon as possible because compound interest can work for you. He calculates that if you invest R300/month for 15 years and it grows by 8%/year, the maturity value of the policy will be R173 019 compared with the R90 000 you put in over the period. But if you start later and put more than double the amount (R1 000) aside every month for eight years, your maturity value will be lower at R133 868, though you invested a higher amount of R96 000 during the period.
Scott says it's important to differentiate between the new generation endowment policies that pay commissions as and when you invest and the more traditional policies that pay brokers commission upfront.
He says the more modern products, such as Old Mutual Investment Frontiers, Sanlam Stratus and policies offered by the linked product houses, such as Investec, are attractive because "you're not buying an investment, you're buying a structure where you get to choose the investment later" and, most importantly, there's no front-end loading.
"When the costs of policies are loaded upfront, the policy has no surrender value for the first three years," he warns.
A 10-year Momentum Life endowment policy at a recurring premium of R500/month, for instance, pays brokers an initial premium of about R155/month for the first policy year and then slightly more than R50/month during the second year.
Sneddon says the primary focus has been on the cost of commissions, but warns that the administrative costs can also be much higher than you expect and these will also eat into your potential investment returns. For instance, during the first year that you take out an Old Mutual group schemes Education Care Plan, there are initial charges to set up the policy of R17,20/month plus a hefty 44,5% of the monthly contribution. Asset charges are 2%/year. There are no commissions on this policy because it is sold directly to the investor.
He recommends paying off all your debt before investing anywhere else and when you've done that, invest in unit trusts ahead of endowments because of the costs involved in the latter.
Debt is expensive, he says, and it doesn't make sense to take out an endowment policy because you'll never get the 26% needed to offer a return and cover the 15%-17% owed on your bond.
He invests in local and international unit trusts on a monthly basis to take advantage of the rand-cost averaging and puts 30% more than he owes into his mortgage bond.
Unit trusts offer a more flexible way to invest than an endowment policy because you can sell them when you need the money, whereas you'd have to wait until an endowment matures. But unit trusts don't have the same tax advantages as endowment policies and need to be invested for the medium to long term to offer the greatest benefit.
De Fleuriot agrees you need to consider whether you can get your hands on the money when you need it. "If you want liquidity from day one, then go to unit trusts," she says. But she warns that if you know you can get your hands on the money, you need to have discipline.
Sneddon says it's just as easy for people who are not disciplined savers to set up a debit order for higher repayments into the bond and adds that someone who is not disciplined is likely to lapse the policy anyway.
