Question

I retired three years ago, with half my income coming from my company pension fund and the other half from interest from investments. I am paying tax at a rate of 41%. Is there anything that I can do to reduce this amount?

Answer

When it comes to saving for a specific goal such as the education of a child, there are two approaches – the head or the heart.

Head

Your head says you should put the money you would have invested for your daughter’s education into your bond or any of your other discretionary investments. By scaling up on existing investments, you can save costs.

If you have a bond where you can access the money in the future you can effectively get a tax-free return equivalent to your bond interest rate.  

The danger with this approach (and I can vouch for it) is that the education savings can get lost in your general household living. It is easy to dip into this investment, as it is mixed up with your general savings or bond. You wouldn’t dream of using your daughter’s education fund to go on an overseas holiday, but if it is in the same vehicle as your holiday fund then it is not such a big deal. 

Heart

The heart approach is less efficient, but in my experience is more successful. 

Here you have a separate investment for your daughter’s education. This can be in the form of an education policy, or a unit trust linked investment. 

A number of companies offer education policies that are designed to cover the cost of education. They usually have some sort of calculator that helps you work out how much you should be investing each month. Many of these have life, disability and retrenchment cover linked to them, although, if you have a decent financial adviser, these risks would have been covered by your existing risk covers and may be superfluous. 

A solution I like to use is one where the costs of education are calculated and an investment structure is created to ensure that those costs are met. 

Each year, the returns on the investment are compared with what was initially projected and future contributions are adapted. Similarly, if there have been big increases in education costs, these are also adapted. Making annual, small changes will increase the probability of you reaching your goal. 

I like this approach, as you are investing for a specific purpose – your child’s education. By having it separate from other investments, you reduce the chances of you dipping into these funds for other reasons.