Back to school: confronting the rising cost of education

22 February 2016

Starting early, saving consistently and minimising tax key to keeping school options open

If you’re worried about your ability to pay school fees in the future, you’re not alone. The cost of education is going up, sometimes by as much as twice the rate of inflation, every year. Neil Rogan, General Manager of the investment bonds division of Centuria, looks at tax-effective strategies which can help you plan for your child’s public, independent or private school fees.

According to estimates released recently, the cost of private schooling in Sydney could be over $540,000[1] for a child born in 2015. And the cost of tuition in a faith-based or public school doesn’t come cheap either. The same study showed that the approximate costs for these options were around $234,000 and $71,000 respectively. In the final analysis, the cost of educating your children could be higher than the cost of your family home.

Saving and investing for education is no different from saving and investing for anything else. The earlier you start, the more likely you are to reach your goal. There is a wide range of investment options available, but for parents or grandparents investing with a medium or longer term goal of funding school fees, managed funds are a popular option. There are a large number of quality investment managers around, and a wide range of portfolio structures to match individual investment horizons and risk appetite.

The catch is that any investment made with post-tax dollars, including managed funds, term deposits or direct investment in equities or any other asset class, can feel like one step forward and two steps back. Returns are taxed at your personal income tax rate, which could mean you are giving the tax man as much as 49 cents in the dollar. And higher tax translates into lower overall returns.

Superannuation is, without question, the most tax-effective option, and the most common way of saving pre-tax dollars. But for many Australians, adequacy of superannuation is already an issue for funding retirement – let alone school fees. And with access to funds proscribed until the latter years, the timing is unlikely to suit most families.

Enter investment bonds

Investment, or insurance bonds, are similar to managed funds in their underlying investment, however, in a number of circumstances they can be more tax-effective. They are technically life insurance policies, but are used primarily as long term investment vehicles. Like managed funds, investment bonds offer the choice of a wide range of portfolio options. At Centuria, our options include growth portfolios, which invest primarily in Australian and international equities, defensive portfolios, which invest in cash and fixed interest, or a range of balanced portfolios, which have a mix of both.

Depending on your marginal tax rate, Investment bonds can be among the most tax-effective savings vehicles on the market, – so long as they are held for over 10 years. This is because investment returns are not distributed to investors as income during the life of the bond, but instead are taxed at the corporate rate of 30% and the income then re-invested. And, if the underlying investments in the bond give rise to franking credits or other tax deductions, then the final tax paid can be less than 30%. There is no need to include returns from an investment bond in a personal tax return, and they do not give rise to a tax liability.

At the end of the 10-year period, you are able to keep the fund going or withdraw the funds without any further tax liability.

Investment bonds may be suitable for parents or grandparents saving to educate children because it is possible to specify a beneficiary or assign the bond at certain stages during the life of the bond, without incurring a penalty. And for estate planning purposes, an investment bond is not included in the estate, with proceeds passing directly to the nominated beneficiary.

The bottom line? Every investor’s situation is different, and investment bonds may not be suitable for everyone, but they are definitely worth discussing with your financial adviser.

CA-CLL-22/02/16-00185

[1] Source Australian Scholarships Group 2015