Saving for your children is one of the most meaningful financial steps you can take. Whether your goal is to cover education costs, help them buy a first home, or simply give them a strong financial start in life, the way you structure these investments can make a significant difference over time. As a parent, you will need to weigh up different savings vehicles, the tax implications, and long-term objectives before making a decision.

Donations Tax and Annual Exemptions

When parents (or grandparents) save for a child, contributions are technically considered donations in terms of South African tax law. Each individual is entitled to a donations tax exemption of R100,000 per year (meaning each parent can make a R100,000 contribution). Any donations, exceeding this threshold may attract donations tax at 20%, which is an important factor if contributing substantial amounts to your child’s investment.

Investment Options: Linked Unit Trust vs Tax-Free Savings Account (TFSA)

Two popular vehicles for child savings are a linked unit trust account and a tax-free savings account. Both offer growth potential, but they serve slightly different purposes. Having a clear investment objective is key in making the correct investment choice.
  

In my experience, I have seen many instances where parents opted for the Tax-Free Savings approach over the Linked Unit Trust. On initial viewing this seems prudent, particularly if you will not exceed the R36,000 annual limit (why invest into an investment vehicle with tax implications when you could choose one that is free of tax?).

Unfortunately, the decision isn’t that simple, and in some instances a Linked Unit Trust would be a far better option.

While tax is a consideration, an equally important factor is the investment objective. What are you saving for and when will your child access this investment?

If the intention is for them to access the investment soon after turning 18 or in their early 20s (e.g. to purchase their first car), the Tax-Free Savings option starts to make less sense. Here are the reasons:

• Tax saving (or lack thereof). The primary advantage to a TFS Account is the tax relief on growth earned within the product. However, both interest and capital gains tax are tied to your marginal tax rate. Most children earn no income and have a marginal tax rate of 0%. While there is no guarantee that this will be the case when your child accesses the investment, it is unlikely that they will be in a high tax bracket at such a young age. As a result, the actual tax savings may be significantly lower than you expect (depending on the investment amount and marginal rate at the time of access, there may be no tax saving). It is also worth highlighting the tax exemptions available to South African citizens:
  • The first R23,500 of interest earned in a tax year is exempt from tax
  • The first R40,000 of Capital Gains is exempt from tax 
  • For South Africans under the age of 65, tax is only payable on amounts greater than R95,750 courtesy of the primary tax rebate. 
• When a withdrawal is taken, your child’s lifetime contributions are compromised. All contributions made in the name of a child count toward their lifetime contribution limit of R500,000.

The combined impact of these two points cannot be understated. It is conceivable that your child may have reduced their total lifetime contribution capacity to a TFS account and have saved no tax in the process. Tax-Free Savings Accounts are powerful investment vehicles, provided they are used correctly. To make the most of a Tax-Free account, you want to maximise the tax benefit offered by the product by leaving it to grow for as long as possible. 

A Word of Caution: Control at Age 18

One often-overlooked risk is that a minor child gains full legal control of their investments when they turn 18. This means they could withdraw or spend the money regardless of the original purpose you had in mind.

Final Thoughts

Starting early is arguably the best gift you can give your children – the power of compounding works in their favour, and small contributions grow meaningfully over time.

There is no ‘right’ answer for every situation; however, I would stress the importance of having a clear investment objective from the start. This will go a long way to guiding you down the correct path.