Bonds – The gift of education

22 November 2017

Author: Centuria Investment Bonds
Date: 22 November 2017

The gift of education – and the hidden costs of funding it

Benjamin Franklin said that “an investment in knowledge pays the best interest” – but given the rates of interest on offer at the moment and the spiralling costs of education, saving enough to fund your kids’ or grandkids’ education can be a real challenge.

Here, Neil Rogan, Head of Investment Bonds for Centuria, looks at the various options for saving and investing for education and offers some strategies for calculating exactly what you will be up for, and how you can maximise what you save to come out ahead.

 

Wouldn’t it be great to know that you had the school fees covered? One less big ticket item to worry about, and the confidence of knowing that you are in a position to make the best educational choice for your child, without being unduly influenced by the price tag.

The issue is that education, and particularly private education, can be monumentally expensive. For the vast majority of Australians, unless they win the lottery, they will be paying for education as they go, and feeling the pressure. As returns on savings attract tax, any attempt to save consistently for a long-term goal can feel like one step forward and two steps back. Super is great from a tax perspective, but it’s not much help if your children will be starting school before you’re 65.

The true cost of education can be surprisingly high

Costs vary enormously depending on the choices you make, but you can be sure of one thing – it’s all expensive.

According to the latest cost estimates[1], for a child born in 2017 you can expect to pay a total of around $68,613 for a fully Government funded (public) education and $487,093 for a private one – and that’s excluding university.

If you are planning on a religious or private education, that total may be leaping higher very soon. Funding changes incurred by the Government’s Gonski 2.0 scheme are likely to leave some schools disproportionately affected, with some Catholic schools resultantly putting up fees by 10% in the coming year alone. The injection of $23.5 billion into public and private schools is overall great news – but private schools subject to the total $1.1 billion funding cuts, and the parents using or planning to use their services, will not be celebrating. This is a further element that needs to be factored in when calculating your education funding goal.

It’s important to be realistic

Education is more than tuition. And the desire of parents to give children a well-rounded education has added to the total cost. An increasing number of parents are concerned that an intense focus on academic excellence in some schools is overshadowing the social and emotional growth of their children, and that children should be more engaged in activities other than academic studies.[2]

This means extra-curricular activities, which more and more parents see as crucial to a well-rounded education, but which also incur an addition cost.

A realistic estimate of education costs should include extras such as books, uniforms and stationery but also the costs of extra-curricular activities – such as sport, music and dance.

The solution? Start as soon as you can, and choose a tax-effective structure

Investment bonds – one of the most tax-effective investment structures to invest in outside of super.

An investment bond is an insurance policy, with a life insured and a beneficiary, but in reality it operates like a tax-paid managed fund. And as with a managed fund, you choose from a broad range of underlying investment portfolios – which can range from growth oriented assets, like equities, to defensive assets such as fixed interest as well as other asset classes and combinations.

An investment bond has a number of attractive features:

Tax effectiveness – An investment bond is tax-advantaged because returns from your investment portfolio are taxed at the company rate of 30% within the bond structure and are then re-invested. They are not distributed to you as income. This means you do not need to include them in your annual tax return, and if you hold the bond for 10 years, all funds are distributed entirely tax-free.

In addition, depending on the underlying investment portfolio, dividend imputation credits and other credits may apply, making the effective tax rate less than 30%. This compares very favourably with the top marginal tax rate of up to 49%.

Affordability – There is no limit on how much you invest in an investment bond. You can start with as little at $500 and make additional contributions every year, up to 125% of the previous year’s contribution.

Flexibility – Investment bonds are most tax-effective when held for 10 years or more, but the funds can be withdrawn at any time if needed. If the money saved is not in fact needed for education, it can be used for any other purpose.

Ownership and transfer. – If you are investing for a child’s education, you can choose to invest in the name of a child over the age of 10, but this means the child will gain full control to decide how to spend the money once he or she reaches age 16. The preferred option in most cases is to hold the bond in the name of a parent or grandparent. This avoids penalty tax rates for children under 18 if they make withdrawals in the first 10 years, the adult stays in control, and the bond can be started for a child younger than age 10.

This is an option preferred by many grandparents putting money aside for a grandchild’s education.

 

In conclusion

Saving and investing for your child or grandchild’s education may one of the most important challenges in your financial life. The key to success will be keeping three things in mind. Start as early as possible, be realistic about the costs and choose a structure that allows you, and not the taxman, to keep as much of your investment earnings as possible. To find out more, visit our education fund page here.

[1] Figures based on the the Australian Scholarship Group (ASG) calculator

[2] According to the ASG Parents Report Card 2016

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