Private Portfolio – Funding education costs
I pointed some of the anomalies that are entering our income tax legislation out in my previous articles. In these articles, I also expressed my views on the tax treatment of so-called ‘education policies’ that seem to be a problem for the authorities.
Since it is abundantly clear and supported by extensive research that the education of a child is already posing a major financial problem, there is no denying that providing and investing for this expense in the future should command priority.
Research has shown that to bring up a child from birth to 18 years of age today, will set one back at least a million dollars or more. Then there is tertiary education still to follow.
These are frightening figures. Our Namibian situation is a little different, if at all. Although I made some critical remarks on the local situation when it comes to so-called education policies and their tax treatment, I do not want to detract from the importance of this financial provision.
It must also be remembered that the introduction of education insurance policies into our tax law for preferential tax treatment, was initiated by the insurance industry.
Since it now appears that the same authorities have a problem administering the tax issues surrounding these policies, I want to illustrate what South Africa has done in this regard.
The government there is also acutely aware of what financial problems education can pose. In collaboration with banks and other reputable asset managers, that government established a special savings vehicle called Fundisa.
It was launched as a pilot project in 2007 and is still going very strong. This investment account has a minimum contribution of N$40 per month and the government adds an annual bonus of 25% on the amount invested; up to a maximum of N$600 per year.
This means the first N$2 400 invested per year qualify for this bonus payment. The asset managers may only invest these funds in income unit trust funds that invest in bonds, fixed deposits and other interest bearing securities. This may detract from its growth potential but at least it is safe.
In 2010 for instance, the income funds had a return of 8,5%. Add to this the 25% bonus from government you had a total return of 33.5%.
The investor can withdraw the funds at any time with the interest earned thereon but not the government bonus. Only if the funds are used for tertiary education, then the funds, including the government bonus, are released to the tertiary education institution.
A system is in place where the tertiary education institution directly debits this account on behalf of the investor.
Should none of the investor’s children go for tertiary education, the funds may be used for another child’s tertiary education. So, if you feel benevolent, you can assist your friend’s child and in so doing not lose the government bonuses.
I showed this example because it is an initiative in a country that is much the same as ours. It illustrates a system that can be used to encourage savings for children’s higher education without throwing the tax law in disarray.