Tax-free savings and the importance of cultivating the saving habit

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SIMON BROWN: I’m chatting with Caroline Naylor-Renn, COO of 10X Investments. Caroline, appreciate the time today. I think it’s one of the universal givens out there that parents want better [things] for their children – and that’s everything from truthfully the toys they get at Christmas, but in the bigger picture it’s going to be education, it’s going to be the ability to save,  perhaps for the first car and the like. Parents really are going to pull out all the stops to help their kids.

CAROLINE NAYLOR-RENN: Absolutely. I think it’s human nature that everybody wants to do the best for their children. However hard the financial situation they find themselves in, they’ll always want to try and make sure that their children’s future is better than their current reality. It is definitely something that everybody strives for.

SIMON BROWN: You make a good point there, no matter how tough it is for the parent. If you’re one of the billionaire babies it’s not a problem. But of course there’s not many of those. For many parents it is going to be a case of having to save for the kids and looking at different options.

In a recent note you put out, I’m reminded around the sort of boom in education policies, which has faded in part I think because education costs more, but also because the returns were truthfully dismal.

CAROLINE NAYLOR-RENN: Absolutely. In the past many people have tried to save for their children’s education, and those policies really just haven’t made it happen. So often the habit of saving hasn’t resulted in the outcome that they wanted, but it still doesn’t remove the need for saving. Education is one of the most expensive things that you can give to your children, so people still want to try and put a little bit away every month to try and save for that.

SIMON BROWN: The tax-free savings came in in 2015; Nhlanhla Nene was our finance minister at the time. March of 2015 was when [the tax-free savings] kicked in. There are limits: half a million in a lifetime, R36 000 per year per individual. Can this work for saving for a child – be it education or perhaps a deposit on a first home or something?

CAROLINE NAYLOR-RENN: Yes, absolutely. The tax-free saver account is a fantastic idea and, as you say, it’s been around for nearly 10 years now. The whole purpose of why it was invented was to try and help people save more. And it is particularly useful when you’re trying to save for your children, be it for educational purposes or any other reason that you want to save.

So yes, you are right. There are limits to how much you can contribute and it works out to R36 000 per year up to that lifetime allowance of R500 000. So, although it’s a limit, it’s an awful lot of saving. If you put the maximum at R36 000 every year, it would be almost 14 years before you are capped out. So it is absolutely a great thing for people to try and do. Interestingly, it doesn’t have to be the parent, it can also be the grandparent. However, within your family, if you want to contribute to your child, then it’s a great vehicle for doing that.

SIMON BROWN: I hadn’t thought of that. Of course, grandparents; maybe a little less at birthday and a little more in tax-free is the challenge. I’ve run numbers before and, because of the power of time, starting the day a child is born, the numbers are absolutely staggering. Is it to start then, to perhaps leave it later so that into the twenties [that will] take some of the pressure off?

CAROLINE NAYLOR-RENN: Yes, it doesn’t really matter when you start. If you started when the child was born, that’s fantastic, because it gets you into the habit of saving on a regular basis. It does mean by the time they’re 18 they have a substantial lump of money. You may or may not want your child to have access to that when they’re 18 – and it might get dwindled away quicker than you would hope. So actually if you started when they are a four- or five-year-old, or even if you start when they’re a teenager, 14 years’ worth of R36 000 plus whatever the growth is, that’s a lovely amount of money for when they’re 25, 28 years old. And, as you say, it could be a first house deposit or a new car.

SIMON BROWN: I suppose you’ve given the answer there. Two key things perhaps come through. The first is it’s around the discipline. And we are talking, as you mentioned, of R36 000 a year, which is a lot. Depending on how many kids you’ve got it could be a very, very [large amount]. It’s around that discipline of saving.

The second point perhaps is that making your kids smart about money is perhaps also one of the things that we can give to our kids.

CAROLINE NAYLOR-RENN: Absolutely. It’s very, very important if you are able to save for your child to actually talk to them about it and to educate them in the habit of saving and why you are doing that. And it’s also for them to appreciate that money takes a long time to accumulate – but if you have that habit it will grow.

So those are real-life lessons that every family should talk about. And it doesn’t matter if you are saving R100 a month or you’re able to put the full maximum in, the conversation is still the same.

SIMON BROWN: I take your point; the conversation is the same and the habit is the same – and both of them hugely important.

We’ll leave it there. Caroline Naylor-Renn, 10X Investments COO, I appreciate the time today.