For parents, grandparents and guardians of small children, the cost of higher education may seem a distant concern. But given how large those costs can be it’s a goal best prepared for early on. And, as with any long-term savings goal, the best time to start saving is now. Investing in child education bonds can give you, and therefore them, a great head start.
“There’s no time like the present; a children’s education bond was set up for my son Miles when he was just a few months old, with my mum and dad (his grandparents) funding the contributions”, says Jo.
“I am going to add to their contributions each year when or if I receive tax back from my yearly tax returns!! I think it’s a great way to add more money in and take advantage of the 125% Add-on Feature.”
The first step is making a budget and deciding how much you can afford to put aside each week. Increase this amount each year to adjust for inflation. Your education savings plan could be as simple as setting up a direct debit from your account and deducting a weekly amount into a dedicated education savings fund, into which you can also make lump-sum contributions.
Child education bonds
You could also choose to invest in a special-purpose child education bond—a type of insurance bond that serves as a vehicle for parents, grandparents or guardians to address financial planning objectives for their children and grandchildren.
Child education bonds are long-term, tax-effective, internally compounding growth investments designed to build specific endowments for children and grandchildren. It’s a way of giving your child a financial head start when it comes to meeting education funding challenges and paying out student loans.
Such products typically have a flexible “vesting” feature, so that the bond’s ownership can be automatically programmed to shift from you as original owner to your nominated child at a specific vesting date. This date is established by you—generally when the child is between 10 and 25 years of age.
Importantly, until vesting, you have full control of and access to the investment, including opting to use the bond completely for your own purposes, rather than allowing it to vest in favour of your nominated child.
Child insurance bonds also carry many taxation advantages; principally, that your investment accumulates under a “Tax-Paid” environment and you are able to make “Tax-Free” distributions to both yourself and/or your child. This means that the long-term investment compounding benefits are amplified. The insurance company pays tax annually (on investment growth) on behalf of you as the bond owner. Effective tax rates generally range between 21 to 30 per cent. The benefit of lower effective tax rates translates to higher unit prices and improved performance.
Map out a game plan
Decide if you want to fund tertiary costs in advance or have your child or grandchild pay via their future earnings through HECS fees. Then, do the research and establish the applicable costs of:
- Private schools
- Catholic schools
- Public schooling
- Total cost of secondary education (Year 7–12)
- Total cost of tertiary education
We always say that people that save first and spend second invariably have more than the people that spend first and save second. When it comes to long-term savings plans, our advice to clients when it comes to long-term savings plans is always:
- Know how much money is needed
- Have a clear savings plan
- Regularly review your progress
- Have a specific saving time frame
- Tell your family and friends about your goal.
For more information or advice call us on (02) 8268 2900 for an obligation-free chat.