Choice, flexibility, and an assurance they won’t be locked into a pre-determined future when looking at options for saving for their children’s education; this is what our research suggests is high on the list for parents with school age children.
When it comes to education planning, most parents just want to understand how to provide a good education for their children, and what funding choices are available for them.
And in light of the recent “Grandparents Day” on the 29th October, we are also seeing a growing trend amongst grandparents, (AKA the “Bank of Gran”) who are dipping into their retirement assets in order to assist with the education funding for their grandchildren.
Historically, one of the problems with some traditional style education savings options is that they can only be used for a very narrow range of expenses.
With education costs outpacing wage increases in Australia, parents – and grandparents – need to be confident they are making the right choice when it comes to planning for their children’s future needs.
Year in, year out, education costs continue to outstrip the pace of inflation, and the past 12 months has been no exception. While inflation, as measured by the CPI, clocked in at 1.5 per cent, education costs clocked in at 3.3 per cent#.
In our previous education funding article we discussed a number of strategies to assist with meeting the future cost of children’s education, summarised as:
- The simplest and most tax effective strategy is repayment of non-deductible debt. However, this strategy requires extreme discipline and runs the risk of the funds being withdrawn to pay for lifestyle assets.
- Direct investment in the name of the child, remaining vigilant that the tax free threshold for minor’s income is just $416 per year, (as a penalty tax of up to 66 per cent* on earnings applies once that threshold has been breached). Even a simple high-earning savings account could breach this threshold with a large enough balance.
A trust structure may also be considered as a funding mechanism for education costs, with the most common type of trust being discretionary family trusts. However this generally still falls under the confines of a minor’s penalty tax of 66 per cent*
Alternatively superannuation funds can be considered as a solution, as long as the investor has reached preservation age and has satisfied conditions of release.
The approach that could offer the most flexibility and the broadest range of features for education savings are investment bonds, which in recent years have certainly come back into vogue in the minds of investors and switched-on financial advisers.
Furthermore, education funding structured within the form of an Investment Bond is classified as Scholarship Plans under Australian tax law. These also have unique tax features not available with other savings and investment products and can be used for a broad range of educational related expenditure at any age or level of education.
The concern of some investors when entering into an education savings plan is that they will be locked into a very narrow range of allowable education expenditure. Not so for investment bonds.
With a contemporary education bond it is possible to claim on a broad range of expenses in addition to just tuition fees. These can include costs such as uniforms, books, music lessons, sports equipment, private tuition, student fees, residential boarding costs, rent and other accommodation expenses.
Separate plans do not need to be set up for different needs – instead a single plan can be used to provide a lifetime of education, in a tax effective way.
The investment income of an education fund is taxed up to a maximum rate of 30 per cent*. While the earnings accrue within the fund there is no assessable income to declare for either the investor or student. Only when funds are withdrawn will it affect assessable income and may be taxed. Even then the tax may be minimised or not incurred at all.
When a claim is made for education expenses from investment earnings, the education fund can obtain a refund of tax on the education expenses being claimed. This produces an education tax benefit which is passed on to the nominated student as part of the education claim and can be worth an additional $30 for every $70 of earnings withdrawn.
The additional benefit with using an investment bond structure is you can get the best of both worlds; if your child doesn’t go on to tertiary education, you can utilise the money for anything you like.”
Thorough research is strongly recommended, as there are a number of ‘copy-cat’ funds that are not true education funds at all.
An investment bond based education funding strategy is not the goose that laid the golden egg; they may not solve every funding need, and basic financial planning principles still apply. It is very much a case of doing the math and crunching the numbers to arrive at the right outcome, using the right strategy, and the right investment structure to meet your goals. The Lifeplan Education Bond is simply another tool in your investment tool kit.
#aabs.gov.au - 25 January 2017
© Lifeplan Australia Friendly Society Limited ABN 78 087 649 492 AFS Licence number 237989 (‘Lifeplan’), a wholly owned subsidiary of Australian Unity Limited ABN 23 087 648 888. The Lifeplan Education Bond is issued by Lifeplan.
Any tax information provided here and in any disclosure documents is general in nature and is only intended to provide a guide on how tax may affect investors. Tax laws may change in the future and may affect an investor’s tax position and the tax information described in any disclosure documents issued.