School fees are the subject of many dinner party conversations from the day a couple gets pregnant. Finance expert, Anthony bell teaches us the best strategy and top tips for saving up for private school fees.
By Anthony Bell
As parents you want to be able to provide the best start to your child’s education and this means being able to cover your child’s school tuition costs.
Ideally, you should commence a savings plan towards your child’s education as soon as you know you are going to become a parent. The reason for this surrounds the simple factor of time. The more time you have to save for such a significant cost the less money you have to put aside each week.
In order to have sufficient money to cover these education costs, whether they be for private school or university, you have a number of money management options to consider.
Education Savings Plan
Education savings plans are specially designed to help you assist with your children or grandchildren’s education.
In order to set up an Education Savings Plan you generally will need to make an initial contribution (approximately $1,000) and make regular contributions thereafter (generally monthly).
Education savings plans can provide some tax advantages, particularly if they are operated as a scholarship plan where the tax paid on the earnings by the provider, generally at the company tax rate of 30%, can be recovered and added to the investment account, as long as these recovered amounts are used to pay eligible education expenses.
Furthermore withdrawals of your contributions are tax-free. However education benefits, when paid to the nominated student, may be assessable to the student.
While an education savings plan may hold some tax advantages it could potentially create a tax liability for the child especially if they are under 18 years of age given that any income between $417 – $1,307 is taxed at a rate of up to 66%.
Insurance Bonds
One other option which can be very tax effective is an insurance bond. One of the main advantages of an insurance bond is that you can withdraw your benefits tax free after 10 years.
If you withdraw your benefits before the 10 year maturity date all or part of the income received will be treated as assessable income however you will receive a 30% tax offset. This can be very beneficial when compared to having the benefits stored in a regular savings account where any interest will be taxed at your marginal tax rate.
Another advantage of an insurance bond is that you can generally contribute up to 125% of the previous year’s contributions. This means that if you invested $20,000 in year 1 you could increase your contributions to $25,000 in year two without the 10 year tax rule restarting.
Mortgage Strategy
The third option could be to use your mortgage as a savings strategy. It is very common to now have a mortgage against your home. Rather than putting money into an investment account, put the money instead into your mortgage or offset account and pay off your loan sooner. This way you will be saving the interest and because it is an interest saving you will not pay any tax on this amount. In effect you are able to guarantee a return on your money and you don’t have the worry of bearing any risk. When it comes time to paying your child’s education costs you can simply draw down on these excess funds when required.
There are a number of options that you can consider when putting money aside for your children’s tuition. As there are so many, it is best to speak to your advisor. This ensures you make the most informed decision that provides you with the maximum return given your risk profile and circumstances.
