With the due date for upfront payment of school fees fast approaching we thought it worthwhile to weigh in on the debate of settling these fees via debit order or full upfront payment. School fees range from R40 000 per annum per child for a public school to in excess of R200 000 per child for a top level private school.
The question that parents face is which route to follow? Typically, upfront payment results in a discount of up to 5%, which results in a saving of R10 000 for a private school and R2 000 for a public school.
If one can afford to pay upfront, then an option to consider is to pay the minimum and invest the balance in a tax-free savings account (TFSA) for your child. A TFSA is an investment where you may contribute a maximum of R33 000 during any year of tax assessment, or a minimum of R500 per month if you prefer. The overall lifetime limit is R500 000. This limit does not include capital growth. These investments are free from any form of taxation, including income tax on interest, capital gains tax and dividend withholding tax. Withdrawals can be made with no penalties. This is an ideal savings tool for future tertiary education fees or a wedding.
The underlying portfolio for the shorter term requirements could be an enhanced income fund which would generate 8% tax free, typically. If you invest for longer term education such as university, then the portfolio selected could be designed for growth. In both instances the returns are typically in excess of the discount involved with upfront payment.
With the eighth wonder of the world, namely compounding return, working in your favour, and tax not being a consideration, a tax-free savings account may be an ideal long-term savings vehicle for your child.