How can I fund my children's education?

By Richard Atkinson, Austock Life Limited

December 22 2016
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Your children's education is often at the forefront of parents' minds, but for those wanting to send the kids to private schools it's vital they plan ahead.

An Insurance Bond is an ideal way to make dedicated savings aimed at funding primary and secondary school fees.

While possible to maintain as a ‘Set-and-Forget’ investment for parents, they make still be able to retain control in case unforeseen circumstances or a change of mind to use the bond for non-education purposes

Importantly, parents (or grandparents) are able to retain control of the investment just in case unforeseen circumstances arise with the child or there is a change of mind to use the bond for non-education purposes.

A bond can be established using a savings plan with the intended purpose of building the investment to a certain level, from which point it can be drawn down to finance a child’s education costs.

During this accumulation stage, there is an option to make additional lump sum or regular contributions under the 125% rule add-on feature.

Given its tax and investment simplicity, it is an excellent vehicle for a “Set-and-Forget” investment.

Funding High-Cost Private Schools

As Australia’s education system has become more “user-pays” in nature – parents (and grandparents) are bearing the increased financial burden for their children’s (or grandchildren’s) education.

For example, three children in private schools at, say, $20,000 p.a. each for 13 years. How does a family amass over $780,000 “after-tax” to fund education? This is a major financial planning challenge and requires a dedicated investment focus.

Case Study

David and Sarah are determined to see that one year-old Nicholas goes to a private school for his secondary education.

They have $2,500 to start their Savings Plan from Sarah’s parents, and hope that with their own monthly savings they can finance his school fees, and possibly have some funds left over for a second honeymoon, or perhaps for Nicholas when he turns 23.

After seeing their financial adviser, Bob, they decide to establish a ChildBuilder Bond.

With Bob’s advice, David and Sarah work out that they can afford to save $200 per month. As they expect their savings capacity will increase in the future, they plan to increase their level of saving by 25% per annum using the bond’s 125% Add-On Feature. Their objective is to build their bond to a certain level, and then begin regular draw-downs to finance Nicholas’ school fees.

Given the long investment time-frame, Bob recommends setting up their bond with a mix of Australian and International share based options from the bond’s menu. Using historical 10 year performance figures of mainstream index funds, an after fees and tax return of 8.29% has been used.

By the time Nicholas turns 12, Bob estimates David and Sarah’s ChildBuilder Bond should accumulate to $140,357.

As this will more than meet their education funding target, David and Sarah plan to stop their Savings Plan and set up a Regular Withdrawal Facility as a convenient way to pay for Nicholas’ school fees. After allowing for inflation they are budgeting on his fees averaging $25,000 p.a. over the six years.

If all goes to plan, when Nicholas finishes school, Bob estimates there should be $49,759 left in the bond, enough to spend $25,000 on their second honeymoon, with $29,044 left to grow in the bond. This could grow to approximately $36,000 to vest for Nicholas on his 23rd birthday, to give him a head start in life.

Richard Atkinson, head of IFA product and relationships, Austock Life Limited

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