Gap year strategy
How to fund a gap year
A gap year is fast becoming a rite of passage for many young Australians who want a break between the rigours of their final year of school and commencing further studies. And if any generous parents or grandparents want to help in funding this time off, there are strategies to assist.
It’s no secret that Australia’s population is ageing. Most of us are likely to live far longer than past generations thanks to advancements in healthcare and a higher standard of living.
What is a gap year?
A gap year is time taken out of formal education and mostly occurs between finishing school and taking up tertiary study. Some students work to help save for university, while others seek experiences, such as an overseas trip.
The National Centre for Vocational Education Research found the incidence of gap-years by Australian students has increased – it is estimated that approximately 25% of Australian students who complete high school will take a gap year before they go on to further education. The most common activities of Australians on gap years were part-time (28%) or full-time work (23%), training (10%), or travel (6%).
Gap year benefits
There are many opportunities and experiences available to those taking a gap year and the benefits include:
- Time to identify and explore their education and career goals
- Development of organisational and work skills
- Time to undertake non-university courses or training to support tertiary studies
- Development of a broader world view, particularly among those who go abroad for travel or volunteer work
- Ability to qualify for Youth Allowance. Deferring and working is the only way that many students can qualify for Youth Allowance; students from regional areas who earn a designated sum during their gap year may qualify as independent and receive Youth Allowance during their studies.
If the gap year experience is one that is valued by prospective employers, a student may gain employment advantages. For example, where they gain relevant work experience, or combine travel and voluntary work, this can add to their skillet and increase their employability after university.
Funding a gap year
One strategy to fund a gap year involves setting up a regular savings plan with the help of Centuria LifeGoals. Regular investment harnesses the benefits of compound interest and dollar-cost averaging, which enables a gradual building up of wealth over time. While many managed investments have savings plans attached to them, Centuria LifeGoals has a wide range of features that makes it especially attractive to regular investors who have a longer-term investment goal.
Start small and add regularly
Centuria LifeGoals can be initiated with as little as $500, and regular investments of up to a total of 125% of the initial investment can be made each year.
Centuria LifeGoals is a tax-effective structure; tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate.
There is no tax liability on maturation after 10 years, and no capital gains tax liability when switching between investment options. However, if necessary, the investment is accessible earlier. If redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in the table below.
|Withdrawal occurs||Taxable portion (of growth redrawn)|
|Within the first 8 years||100%|
|In year 9||Two-thirds|
|In year 10||One-third|
|After 10 years||Nil|
No annual tax reporting
No one likes paperwork and while the money remains invested, the manager of the investment bond will pay tax on investment earnings; there is no requirement for the investor to declare those earnings in their annual tax returns.
Centuria’s LifeGoals offer a wide range of investment options to choose from.
Earnings are automatically reinvested in the bond and because investors have no capital gains tax liability, reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering personal capital gains tax.
Centuria LifeGoals provide the freedom to nominate anyone as a beneficiary. As an investment bond falls outside of the estate, it is not distributed according to the Will, nor is it affected if the investor dies intestate. Once the 10-year investment period ends, or in the event of the death of the investor, the investment bond is paid tax free to the nominated beneficiary or beneficiaries.
Case study: Helping to fund a gap year
Kerrie and Sam have two children in primary school and want each of them to have the opportunity to take a gap year if they wish, to see the world and contribute through voluntary work.
They invest $1,000 to start a regular investment plan using Centuria LifeGoals. Each month, Kerrie and Sam add $100 through a regular investment plan, and each year, the regular investment amount is increased by 25%.
Source: Centuria – figures assume investment returns of 4% income (70% franked) and 3% growth, and that the investment is held for 10 years. This example is for illustration purposes only and does not purport to represent the returns achievable in any particular investment option. Investments are subject to risk, including the risk of negative returns. Changes to the assumptions given in the illustrative example will alter the outcome.
If the outcome in this example is achieved, Kerrie and Sam’s investment will have grown to a little over $49,000, tax paid, by the time their first child finishes school. Thanks to investing using an investment bond, both children will have a funded gap year to explore the world and take up opportunities that will help them develop skills to benefit their future employment.
Disclaimer: Please note this is general information and does not consider the circumstances of any individual. It is based on an understanding of current legislation, but no warranty if given for its accuracy. Any person intending to act on this information should seek the assistance of a professional adviser.