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Surge of interest from grandparents to fund grandchildren’s education

24 June 2021
Author: Adnan Glinac, Executive General Manager – Life & Super

A recent scan of the news reveals the many ways COVID-19 shaped Aussies’ behaviour. We’re all shopping online a lot more, hand sanitiser is a must-have accessory, and we’re all more thankful every time we see our nearest and dearest.

I’ve seen the last factor driving the decisions of some of our investors over recent months. Prohibited from visiting loved ones throughout lockdowns, I’m seeing grandparents not only wanting to make up for lost time in supporting their adult children and their families, but also wanting to leave a lasting legacy for their grandchildren, using the savings they accrued through 2020.

As education costs continue to outstrip the pace of inflation, education-funding products are quickly gaining popularity, and it’s one way I’m seeing grandparents stay connected with their families.

It’s not hard to understand why some families would welcome this type of financial help. According to the ABS 2015-16 Household Expenditure Survey, the largest increase in household spending was in education, which jumped by 44 per cent in six years. And, while private school fees vary across Australia, parents can expect to pay anywhere up to $40,000 per year for a Year 12 student for a private school, not including any boarding fees or additional costs.

Neil, a grandparent who’s among our clientele at Australian Unity (name changed for anonymity), is assisting his nine grandchildren through an education savings bond. Neil first established the plan 15 years ago to provide his grandchildren with the same education opportunities that he, his wife and their children had growing up.

At the birth of each grandchild, Neil would contribute an additional $5,000 to the bond, and thereafter pay $250 per child each month until that child reached high school. At one stage, Neil was paying $2,250 each month, growing the combined excess funds to $350,000 in value before the drawdowns commenced.

That might sound like a huge sum of money for Neil to devote to his grandchildren’s education, but that’s just one of the ways grandparents can put money aside – not all of which require hundreds of thousands of dollars. I’ve broken down several of the common approaches - and their limitations – to try and help grandparents make the best decision for their families.

Education Savings Bond

Education Savings Bonds provide a tax-effective, flexible way to save and pay for a broad range of education expenses for all school-aged children. Just like Neil’s approach, the bond is established with an initial contribution of just $1,000, and best serviced through regular payments to grow the capital.

While investment income in the bond is taxed at a maximum rate of 30 per cent, income is only assessable and taxed once the funds are withdrawn. Even then, the education fund can claim a tax refund of $30 for every $70 of earnings withdrawn for a broad range of education expenses – so tax may be minimised or potentially not incurred at all.

If, for whatever reason, your grandchild doesn’t need the funds for education expenses, you can utilise the money for anything that you like – such as their home deposit or first car. Just be aware these withdrawals do not qualify for the Education Tax benefit and will be assessed as investment income.

Investing in a child’s name

In days gone by, when the tax system was simpler and more generous, grandparents may have purchased shares in their grandchild’s name. This approach can still be used today, but it has become less favourable in recent years due to the tax implications of assigning a child as the beneficiary.

Today, in most cases, the tax-free threshold for children’s income is just $416 per year, and they are hit with a penalty tax rate of 66 per cent on the dollar once earnings rise above that. Despite record low interest rates, even the annual interest accrued by a simple online savings account could breach this threshold for some. Where a child under 18 does receive investment income (including dividends or savings account interest), parents will be required to lodge a tax return on their behalf.

Setting up a trust

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. Essentially, a family trust allows people to exercise discretion when distributing funds to members. They are commonly used to protect assets such as property or business, and provide a range of tax benefits. Keep in mind that if unearned trust distributions to a minor exceeds over $416 in the tax year, exceeding income may still fall under the minor’s penalty tax rate of 66 per cent.

It’s important to speak with a financial adviser when considering whether to set up a trust. For most people, setting up a trust for the sole purpose of funding a child’s education is like using a sledgehammer to crack a nut. There are simpler and less onerous ways to do it.

Using your superannuation fund or setting one up for the child

You may be able to use your own superannuation fund, granted you’ve reached a preservation age (typically 55 to 60) and have satisfied conditions of release. This approach would see grandparents make additional super contributions, before deploying the funds once they are able to access their super. This approach relies on a window of opportunity – timing is critical.

The superannuation sector also runs through an unrelenting pace of legislative change, which means what works one year may not work the next.

Drawing down the home mortgage

Lastly, and one of the most common strategies, is to repay the home mortgage above the monthly minimum repayments, with the intention that the money can be redrawn for education expenses later. Be warned however - this strategy requires extreme discipline, and you need to be wary so as not to redraw funds for a lifestyle your income cannot provide.

If you have paid off your home, borrowing using your home equity as security may be an option. Like all forms of credit, the decision to borrow must be well-considered with your own financial circumstances, so it’s important to discuss this with a financial adviser.

So, what do you choose?

For any grandparent, there’s no one size-fits-all solution; as always, sound financial principles apply and solutions must be tailored to everyone’s individual circumstances. It’s a case of talking to your financial adviser and crunching the numbers to arrive at the right strategy and structure for your family.

Important information

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. Products are issued by Lifeplan. Information provided here is general in nature and indicative only and has been prepared without taking into account your financial situation, objectives or needs. You should obtain the Education Savings Fund Product Disclosure Statement (PDS) before making any decision about whether to invest. Any decisions relating to a financial investment should only be based upon a consideration of your overall objectives, current and anticipated situation or needs, and should not be influenced by historical data such as past performance. It is recommended that you seek your own financial, legal and/or tax advice prior to making any financial investment decision. Any articles and/or information referred to as a direct or indirect result of this article is intended as only a guide. Information published is relevant at time of publication of this article but may however change in the future. Lifeplan does not provide any guarantees for information provided in this disclosure, especially given the volatile economic climate.

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