As a parent, you know very well that the cost of private education continues to rise, with some schools
charging up to $20,000 a year, sometimes more, and this does not include uniforms, day trips, and
extracurricular activities. The cost of obtaining a university degree, particularly in popular disciplines such
as law, computer science, and medicine, also goes up.

The main point is that education is becoming increasingly expensive, and competition for entry into the
best courses will only get tougher. Instead of letting your children start their working lives with debt above
their heads, starting a savings plan when they are young is the answer. The key is to come up with a
good plan as soon as possible and stick to it.

Most parents know that this is important, but they are not sure where to start or what product or strategy
to follow, particularly where there are delicate tax rules to know. For instance, if you place the investments
in your own name, any interest income is added to your taxable income and can reduce your family tax
benefits. If you put the investments in your child’s name, the penalty rates apply when they have
“unearned” income in excess of $416.

 

 

So what to do? Below are some options to consider.

1. Mortgage offset account
If you have a mortgage, you can accumulate funds into a mortgage compensation account. It
works both ways by reducing your interest charges simultaneously. You can withdraw from the
compensation account when tuition fees are due.

2. Investment bonds
One option is an “investment bond”. These products can have different names but are essentially
tax-paid life insurance policies where you choose the investing strategy. If they are held for ten
years or more, the proceeds are exempt from tax at the time of collection. One practical aspect is
that after 10 years, the investor can continue to be tax-exempt by contributing up to 125 per cent
of what they did the prior year. Reinvested income is not counted towards the investor’s taxable
income. You can use the funds for any reason, not just for educational costs, if you cash it in
before 10 years have passed. However, there may be tax implications.

3. Friendly society education plans
These share certain similarities with investment bonds. A friendly society invests its earnings
and pays tax at the corporate tax rate, which is now 30%, and all income is reinvested. However,
if the money is used for educational purposes, a unique tax break enables the friendly society to
claim back the tax paid. The plan’s proceeds must be utilized for educational purposes, but
contributions and withdrawals are more flexible than they would be with an investment bond.
One solution rarely works for everyone, so we advise speaking with your certified adviser to find
the solutions that are most appropriate for your needs and those of your family.