04.Other savings options
If you have a mortgage, consider paying it off first before putting money into an education fund. Salary sacrificing into super is also a good option. Both will only work if you can manage to pay education costs from your cash flow once the mortgage and your retirement have been taken care of.
If you’re on a high marginal tax rate, your next best option might be insurance bonds or education savings programs.
Think carefully before investing in The Education Fund from the Australian Scholarship Group, as your child will only receive the full benefit if they successfully complete an eligible full-time three-year course. While an investment in Lifeplan’s Education Investment Fund is more flexible, tax advantages are lost if you don’t use the earnings for education expenses.
Pay off your mortgage
Paying off your mortgage as quickly as possible saves you in interest and frees up your cash-flow. Make sure your mortgage has a redraw facility with low or no fees or an offset account, so that you have access to the money if you need to draw on it for education expenses.
- Your return is the interest saved on your mortgage, currently probably around 6.5% - an after-tax return which is hard to beat by any other investment.
- You need to be disciplined and don’t access the money for other expenses.
Salary sacrifice into super
Contribute extra into super to make sure your retirement is taken care off before the school fees hit.
- Tax advantages: Extra contributions up to a cap (currently $25,000) are taxed in the super fund at a maximum rate of 15%. Investment earnings are taxed at 15% and once you are 60 years old you can access your super tax-free.
- Only works if, once you stop contributing to super, you have enough money freed up to pay the education costs out of your normal cash-flow.
- Money in super is locked away and you can’t access it early.
Insurance bonds work like a managed fund and are available from a range of financial institutions allowing a range of investment strategies.
- Can be set up in your or your child’s name. Some insurance bonds allow you to nominate an age when the ownership transfers to the child.
- Tax advantages: If you hold the investment for ten years and contribute no more than 125% of last year’s contribution each year you won’t be taxed for the earnings. Earnings will get taxed within the insurance bond at the company tax rate of 30%. If the funds are accessed in the first 8 years then all earnings are assessable. If accessed in years 8 to 9 then two thirds (2/3) of the earnings are assessed and if accessed in the 9th year but before the tenth then one third (1/3) is assessed. So, if you are on a lower marginal tax rate than 30% you will receive a credit. If you are on a higher marginal tax rate you will need to pay additional tax if you access the earnings before ten years.
- Entry, management and other fees may apply.
Online savings accounts, managed funds, and shares
Investments such as online savings accounts, managed funds and shares can be a way to set money aside for your children’s education. However, consider the flexibility of the investment: while online savings accounts are readily accessible, you would want a long-term investment timeframe for an investment in managed funds or shares. As you begin to approach the time you will need access to the funds, consider moving the money into a more accessible investment.
- Can be started at any stage and gives you freedom of choice for your investment strategy.
- Can be suitable for people on a lower marginal tax rate.
- Earnings will be taxed at your marginal tax rate, so it might be a good idea to hold the investment in the name of the parent with the lowest marginal tax rate. 50% of all capital gains are tax-free, the rest is taxed at your marginal tax rate. Tax concession such as franking credits may apply.
- Minimum investment amounts and costs such as brokerage, or entry and ongoing management fees, may also apply.