The gift of education and the cost of funding it
By Neil Rogan (on behalf of Cuffelinks)
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.
Wouldn’t it be great to know that school fees were 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.
Education, 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, attempts 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 – education is expensive. According to recent research, parents of a child born today, who has a fully government funded (public) education, including university, will spend in the order of $200,000 on education. A fully private education, on the other hand, comes in at nearly $700,000. And a mix of the two will be somewhere in between (based on the Australian Scholarships Group calculator). It’s a lot of money to save, and if you have more than one child, it’s daunting.
Education is more than simply 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.
This means extra-curricular activities, which many parents see as crucial to a well-rounded education, but which incur additional costs.
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.
Start as soon as you can in a tax-effective structure
An investment bond is an insurance policy, with a life insured and a beneficiary but, in practice it operates like a tax-paid managed fund. As with a managed fund, you choose from a broad range of underlying investment portfolios which can range from growth-oriented to defensive assets.
An investment bond has several features:
- Tax effectiveness
Returns from investment bonds 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%.
There is no limit to how much you can 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.
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 saving 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.
Saving for your child or grandchild’s education may be 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 savings as possible.