Although children love to receive shiny presents on special occasions, it is often wiser to give them a gift that can help to secure their financial future. Such gifts may not be as exciting, but they will be appreciated when their value becomes apparent, such as when an investment matures, or a child needs funds for tertiary study.
This article considers the best financial gifts to give to a child, along with some of the tax implications of gifting.
The value of financial gifts
Farzana Botha, segment manager, communications and marketing at Sanlam, says that financial gifting, if done correctly, can help to break the cycle of generational poverty prevalent in South Africa. However, this means giving children not just a financial tool but also the knowledge and skills to manage that tool.
“A child needs to learn about and appreciate the advantages of such a product. This may mean working with them to reach an understanding about the world of money,” she says.
Cheryl van Rooyen, a certified financial planner at Efficient Wealth, says the first step is to think about the goal behind the gift, which will determine the type of product you select; along with the age of the child.
For example, consider if you need a flexible and liquid product, where the funds can be easily accessed, and whether a medium-term or long-term investment would be more appropriate to achieve the desired result, such as funding a child’s tertiary education.
Which gifts are most beneficial?
Botha says the simplest financial gift is Krugerrands, which are gold coins that were minted by the Republic of South Africa in 1966. These tangible asset-type investments introduce children to the value of money and can be stored safely at home. This is an uncomplicated gift with real financial worth, providing South Africans with an easy way to invest in gold.
However, if you’re keen to give a child a head-start in understanding finances, you may consider opening a tax-free savings account in their name. Teaching children about saving, and having the patience to reap a reward, has inestimable value.
“This type of account has a R36,000 annual limit, and a R500,000 lifetime limit, so if you materialise that limit early on, the compound interest can almost triple the amount gifted over a 16-year period,” says Botha.
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 are also a solid choice for children, especially as their inflation-beating performance makes them ideal as informal education funds.
“You can reward the child for milestones reached by adding small amounts to the account over time,” Botha says. “Unit trusts can be accessed at any time, however, they do attract taxation.”
Thembeka Khumalo, client and platform manager at Satrix Managers, says that 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 an obvious choice as gifts. They are flexible and offer diversification by giving the investor exposure to a group of equities, market segments or investment styles,” he says.
An education plan – usually an endowment policy that matures on a specific date after a set period, such as five years – is another option worth considering. These are safe investment vehicles as pay-out on maturity is guaranteed, and there are penalties for early withdrawal, which reduces temptation.
It is worth investigating the costs before purchasing, however, as this product can be pricey. Growth on these policies is taxed at a flat rate of 30% – an advantage if your tax rate happens to be higher.
The tax implications of gifting
Van Rooyen says gifting investments can be complex in our highly regulated industry. As a rule of thumb, make sure 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 (SARS),” she 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,” says van Rooyen. “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 notes, it’s important to consider likely taxes on contributions, maturing investment proceeds, or future withdrawals, as this can have an impact on your financial affairs.
Article credit What are the best financial gifts for children? | JustMoney