Education funding strategy
The gift of education
We all want the best for our children and grandchildren and one of the most valuable gifts you can give them is a good education. But this often comes at a considerable price, which is where setting up education funding can help.
Gone are the days when education was free. The 2017 Household Expenditure Survey report from the Australian Bureau of Statistics (ABS) found Australian households are spending more each week on living and learning than in previous years, with the biggest increase in expenditure being on education: up 44% since the previous survey in 2011.
The ABS attributed the rise in education spending to school fees, which rose by almost half from 2009-10 to 2015-16.
In an environment where wages growth is stagnant and education expenses are increasing at a rate far greater than inflation, how can you provide the best education for your children or grandchildren?
One option is to set up education funding. Knowing school fees are covered is one less expense you need to worry about, and it also frees you to make the best educational choices without being unduly influenced by the cost.
Education funding can be achieved using Centuria LifeGoals investment bond. An investment bond is an insurance policy, with a life insured and a beneficiary, which operates like a tax-paid managed fund. And as with a managed fund, you can select from a broad range of underlying investment portfolios, which range from growth-oriented assets such as equities through to defensive assets such as fixed interest. They can also include other asset classes and combinations of assets.
Centuria LifeGoals has several advantages over other investment vehicles:
Returns from an investment portfolio are taxed at the company tax rate (currently 30%) within the bond structure and are then reinvested. They are not distributed as income, so you do not need to include any earnings in your annual tax return. If the bond is held for 10 years, all earnings are distributed tax free.
Depending on the investments in the underlying portfolio, dividend imputation credits may apply, making the effective tax rate less than the prevailing company tax rate. The 30% rate compares very favourably with the top marginal tax rate of up to 47%.
Capital gains tax simplicity
As earnings are automatically reinvested in the bond, reinvestment dates do not need to be tracked for capital gains tax purposes. In addition, the bondholder can switch between investment options without triggering a capital gains tax liability.
There is no limit on how much you can invest in an investment bond – it may be as little as $500 or as much as $5 million. Importantly, you can make additional contributions every year, which can be up to 125% of the previous year’s contribution, making Centuria LifeGoals a very effective way to build your fund.
Centuria LifeGoals are most tax-effective when held for 10 years or more, but the funds can be withdrawn at any time as required. If you find the money saved is not needed for education, then it can be used for any other purpose.
Ownership and transfer
If saving for a child’s education, the investment can be held in the child’s name once they are aged 10 or above. This means however, that once the child reaches the age of 16, they gain full control and can decide how to spend the money – which may not be on their education.
Therefore the preferred option in most cases is to hold the bond in the name of the parent or grandparent. This avoids penalty tax rates for children who are 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. Many grandparents who want to put money aside for a grandchild’s education prefer this option. If ownership is later transferred to the child, the original start date is retained for tax purposes.
Planning ahead is a smart move
Estimates suggest the cost of educating a child born this year could reach as high as $66,320 in the government sector and nearly $500,000 in the private sector. Wages growth is unlikely to experience a similar growth trajectory, so it’s important to plan ahead to ensure that educating your children, or grandchildren, does not put unwarranted financial pressure on your family.
Case study: Saving for a private secondary education
James and Vicki recently celebrated their daughter’s second birthday. After meeting a financial adviser, they agreed that one of their key objectives for Olivia is to send her to a private secondary school. They had been reading about the increased cost of education and realised they needed to start saving as early as possible to ensure they could meet Olivia’s future education costs.
Because both parents are on the highest marginal tax rate, an investment bond is the most tax-effective investment for them. They had saved $10,000 in a cash account, which given their long-term investment horizon, they invested in a growth option in Centuria LifeGoals. They added $5,000 at the beginning of each year for the duration of the investment.
As illustrated in the table below, at the end of the investment period, Vicki and James had accumulated a tax-free amount of $93,770 to put towards Olivia’s education. While it may not cover all her education costs, it will alleviate many of the household stresses associated with the rising cost of education.
Disclaimer: Suitability of a Centuria LifeGoals investment will depend on a person’s circumstances, financial objectives and needs, none of which have been taken into consideration in preparing this case study. Prospective investors should obtain and read a copy of the Product Disclosure Statement (PDS) for any Centuria LifeGoals investment and consider the information in the PDS in light of their circumstances, objectives and needs before making a decision to invest. This document is not an offer to invest in Centuria LifeGoals. Investment in Centuria Life Goals is subject to risk as detailed in the PDS. Centuria will receive fees in relation to the management of its Investment Options as detailed in the PDS. Issued by Centuria Life Limited ABN 79 087 649 054 AFSL 230867.