Giving a child a good education can be expensive
Recent studies have shown that 45% of Australian families will educate their children in the private school system, but private education comes at a cost.1 Throw in incidentals like excursions, books, laptops and uniforms and there’s no doubt about it – giving a child a good education can be expensive.
Researchers estimate that only about half of parents can afford to pay for fees out of their disposable income. Many turn to credit cards, personal loans, extend their mortgages or call upon grandparents for assistance.
|
Public school costs |
$75,000 |
|
Private school fees |
$555,827 |
|
Tertiary education |
$91,677 |
|
Average home deposit in Sydney or Melbourne |
$220,000 |
How do you make sure you have the choice of education options when the time comes?
The key is to have a plan, start early and consider an investment bond for a tax effective, flexible investment solution.
How an investment bond can help?
Investment bonds are a tax effective way to save for the cost of education as they are a compound, tax paid investment. The bond pays tax at a rate up to 30% (often considerably less) rather than the investor’s individual marginal tax rate. Investors will not need to declare any annual income from their bond in their annual tax returns (unless withdrawals are made) and their investment is tax free after 10 years with flexible access throughout.
Case Study: Mary and John, successful married lawyers, intend on sending their 2 year old son Max to a private school with fees expected to reach $30,000 p.a. They would like to have some extra funds available in the bond for contingencies (school trips, gap year etc.). They are both taxed at the highest Marginal Tax Rate (MTR) of 47% (including Medicare). They initially invest $15,000 into a Bond and start an annual savings plan of $15,000, escalating at 5% (slightly over the inflation rate) for the next 10 years.
|
Initial Investment |
$15,000 |
|
Earnings (after fees/tax) |
7.5% |
|
MTR individual |
47% |
|
Regular saving amount p.a. for 10 years |
$20,000 |
|
Total Contributions |
$176,446 |
|
Total withdrawals |
$295,000 |
|
Annual Savings Plan Escalation |
5% |
|
Balance at end of year 20 |
$98,5562 |
Using the bond to fund Max’s school fees gives Mary and John an immediate tax arbitrage compared to their own marginal tax rates. Although the Bond has performed well and they have had to declare the assessable portion of withdrawals during the early years (6 – 10 incl.), in their tax return, the net investor tax is very low due to the 30% tax offset they receive up to year 10. They will only pay a total of $2,884 personal tax on the growth of the bond, over a period of 5 years and nothing thereafter.
Generation Life’s ChildBuilder investment bond is an ideal way for building dedicated savings to fund education costs. With ChildBuilder’s savings plan feature you can build the investment to a certain level, from which point you can begin drawing-down to finance the nominated child’s education costs.
Generation Life is an Australian leader in investment bonds. We’re the number one provider for net fund flows over the past 4 years.3 Our bonds have received a Highly Recommended Rating from Zenith Partners for 10 consecutive years and we provide an extensive investment menu with choice and quality for investors.
Alternatively, click here call your local Generation Life Distribution team member:
1.Australian Bureau of Statistics 6530.0 - Household Expenditure Survey, Australia: Summary of Results, 2015-16.
2.Calculations: Generation Life, Moore Stephens audited calculator
3.Strategic insight Actuaries & Researchers – December 2017.
Generation Life Limited AFSL 225408 ABN 68 092 843 902 is the issuer of investment bonds (IB). The Product Disclosure Statement should be considered in deciding to acquire or to hold an IB. This information has been prepared without taking into account the objectives, financial situation or needs of any individual.
The Zenith Investment Partners (“Zenith”) Australian Financial Services License No. 226872 rating (assigned November 2017) referred to in this document is limited to “General Advice” (s766B Corporations Act 2001) for Wholesale clients only. This advice has been prepared without taking into account the objectives, financial situation or needs of any individual and is subject to change at any time without prior notice. It is not a specific recommendation to purchase, sell or hold the relevant product(s). Investors should seek independent financial advice before making an investment decision and should consider the appropriateness of this advice in light of their own objectives, financial situation and needs. Investors should obtain a copy of, and consider the PDS or offer document before making any decision and refer to the full Zenith Product Assessment available on the Zenith website. Past performance is not an indication of future performance. Zenith usually charges the product issuer, fund manager or related party to conduct Product Assessments. Full details regarding Zenith’s methodology, ratings definitions and regulatory compliance are available on our Product Assessments and at www.zenithpartners.com.au/regulatory-guidelines-funds-research.
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