Can you contribute to a retirement fund on your child’s behalf?

Published on 20th March, 2023 at 12:03 pm

As a measure to set their children up for long-term financial confidence, some parents explore the option of opening a retirement annuity (RA) on their minor child’s behalf and contributing to it regularly. We spoke to Certified Financial Planner^® Riaan Crowther of Sleewijk BlueStar, authorised by Sanlam, to learn more.

Reading time: 3 minutes

In this article you’ll learn:

• The advantages of contributing to an RA for your child while they are still a minor.
• The limitations of contributing to an RA for your child while they are still a minor.
• How the Sanlam Reality retirement calculator can help you save.

Benefits of starting this investing habit (as a parent)

Investing on behalf of your child is a generous act on your part, especially in today’s financial climate. If you consider investing, it is wise to first consult a qualified financial planner to explore your goals, needs and abilities to contribute. “For example, before considering investing in an RA for your child, do you have enough savings in place for education costs, or do you have savings available for a rainy day? Are your own retirement plans taken care of so that you do not become a burden to your children later on in life?” asks Crowther.

Going ahead? Here’s what you need to consider

If you decide to invest in an RA for your child, the power of compound interest and growth help ensure that you can make a significant contribution to a minor child’s financial freedom when they reach retirement age. “Once your child starts to earn their own income, and can take over the contributions, the normal retirement fund rules apply in terms of the deductibility of contributions and access to retirement funds,” explains Crowther.

For example, if you invest as little as R250 per month, escalating at 10% per year for 18 years (and assuming a growth rate of 10%), the balance will be about R300 000 after 18 years. If you stop contributing when your child turns 18 and leave the funds to grow, when they reach the age of 55, those funds should be equivalent to roughly R10 000 000.

Tax and your child’s RA contributions

You as parent and contributor towards the RA will not receive any tax benefit from the contributions made on behalf of the minor child. “Any contributions made will also not roll over and later be applied to your minor’s tax benefit,” notes Crowther.

Yes, withdrawal limitations still apply

Investors cannot, except in exceptional circumstances, make a withdrawal from an RA before retirement. Minors invested in an RA will only be able to access their investment when they eventually retire, at which point they will be allowed to withdraw one third in cash, a portion of which is tax-free. “The rest of their investment must be transferred into an annuity, after which income withdrawals are taxed according to the applicable tax tables,” says Crowther.

Consider these alternative routes for investing on a minor’s behalf

If it’s your goal to save money for use at a later stage, but before age 55, Crowther discusses the following options:

A tax-free savings account (TFSA)

“The flexibility this offers means that this option is often used as a savings vehicle to contribute towards a child’s tertiary education. You can invest in this product in your child’s name and they will not be liable for capital gains tax when they eventually withdraw. The amount you invest on behalf of your children will, however, reduce their own lifetime contribution limit.

This type of investment is subject to estate duty (tax) and executor’s fees upon death of the investor,” he says.

An investment plan with a short- to medium-term investment horizon

An example could be an endowment or unit trust. “Unit trusts are a more common choice for many parents due to the flexibility and easy access to funds, with a variety of fund choices and different asset class exposure,” concludes Crowther.

Use the Sanlam Reality retirement calculator to find out how much you need to contribute to reach you or your child’s retirement goals.