A common question we get this time of year is “What is the best way to fund our children’s education?”. There is not a one size fits all solution because we’re all starting from a different point. Some popular themes include:
- Incorporate your children’s education funding into your overall financial planning strategies – don’t just look at a solution to this issue in isolation.
- Maintain a level of flexibility in your strategy because things do change.
- Make a plan and begin executing the plan as soon as you can.
With these themes as a starting point, here are a few strategies and tools that you can use to assist in funding your children’s education:
Paying down your mortgage and redrawing
Reducing and eliminating non-tax deductible debt (such as a home mortgage) as fast as possible is a very sensible strategy. So, one of the simplest and low risk ways to “save” for a child’s education is to make additional mortgage repayments. Then when the school fees are due you can withdraw the required amount from your offset account or redraw from your mortgage. To ensure this is easy to manage, speak to your bank about adding an offset account if you don’t already have one.
Insurance3 bonds or education bonds
An insurance bond is an investment vehicle that has specific and special tax treatment. It is known as a tax paid investment, which means that the final payout is received tax free if held for longer than 10 years. A common issue identified in saving for children is that they are taxed at very high rates on income earned from investments. So, it doesn’t usually make sense to put children’s investment vehicles in their own names if we expect them to build up to substantial amounts over time.
Insurance bonds help alleviate the tax issue as a parent or grandparent will generally hold the bond in trust for the child. If the bond is redeemed prior to 10 years, any assessable income will be attributed to the parent/grandparent, who will pay less tax than the child would’ve otherwise have paid. There are several providers of insurance bonds and many now offer a range of investment options.
Managed investments, index funds and shares
Managed funds, Index funds and shares offer more control and flexibility than an insurance bond as they can provide access to capital at any time without incurring penalties. One of the major advantages of managed funds and index funds is diversification. If you start with $1,000 to invest, realistically you could only buy shares in one company. Using a managed fund or Index fund you could have immediate access to multiple managers across different asset classes.
For this class of investment you will need to consider how best to own the asset. If the investment is held in the parent’s name, earnings will be taxable to the parent, making it an effective strategy where one parent has a low marginal tax rate.
Increasingly common these days is taking an early inheritance to help fund your child’s education. Inheritance effectively skips a generation and is applied directly towards the education of the grandchildren.
The most important thing is to have a plan and start putting that plan into action as soon as possible!