There are a number of different ways that you can save for your children’s education, especially as it’s likely to be one of the biggest family expenses that you’ll ever have.
It’s important to try and start as early as possible as saving for a child’s education is very much a long-term strategy, often taking 7-10 years. Some key things to consider when setting up an education strategy is to look at whose name will it be in, what structure should you use, and what should you invest in.
Whose name should I put the investment in?
Starting an investment in your child’s name is often the least tax-effective way of saving. It does seem strange that any income earned in a child’s name is taxed at up to 66%, which is why most parents choose to put the investment in their own name, usually the parent on the lowest marginal tax rate.
What structure should I use?
Direct shares and managed funds can be good choices for such a long-term strategy, however things can get a bit tricky if both parents pay high marginal rates of tax.
This results in the tax paid on dividends, for shares, or distributions, for managed funds, being quite high in some cases. That’s why using direct shares or managed funds can be a good way to go if your marginal tax rate is 30% or less. That said, if the shares or managed fund that you’ve invested in has performed very well, then you may not mind paying a higher proportion of your earnings in tax. Plus using a managed fund allows you to make regular savings easy, through using a monthly savings plan.
Then there are education or scholarship plans, where your regular investments are locked away for an agreed number of years, usually until your child starts school.
There are only a few of these currently available and while they do offer some tax benefits, they have much less flexibility for families and can only be used to pay for education costs. They also often have quite conservative investment strategies, which may not suit a lot of people.
One structure that has become popular again, after falling out of favour with investors for many years, is the insurance bond. Insurance bonds work very much like a managed fund, but can be a much more tax-effective option, especially for those parents on marginal tax rates of 30% or more. Not only can they be set-up in your child’s name but their investment earnings don’t have to be included in the parent’s tax return each year.
This is due to any tax on the bond’s investment earnings and realised capital gains being paid by the issuer of the bond at the company tax rate of 30%, which can be even lower if the bond receives any dividend imputation credits. Add the fact that you pay zero tax if the bond is held for 10 years or more, and you can see why insurance bonds have again become a very attractive long-term savings option for parents.
What should I invest in?
There are a number of things that you need to consider, such as your current financial position, your appetite for risk, how much you’d like to save and how much flexibility you need. A financial adviser can help you to choose the most appropriate structure, and underlying investment strategy, to help you provide your children with the best education you can.
For further information, or to set up an obligation free consultation, contact us today.
RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. This article does not consider your personal circumstances and is general advice only. You should not act on the information provided without first obtaining professional financial advice specific to your circumstances.