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Strategies to fund a gap year

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Promoted by Centuria Capital Limited.

The gap year is fast becoming a rite of passage for many young Australians, as they seek a break between the rigours of their final year of school and commencing further studies at tertiary level. Some students take a break to work and earn money to help them through uni, while others seek experiences – some for fun, others related to their tertiary studies and career goals. What strategies can you employ to provide for an exciting and relevant gap year experience for your children or grandchildren?

More than 220,000 students completed year 12 Australia-wide in 2017. From this juncture at the end of secondary school, there are many pathways – including apprenticeship, employment, or tertiary education – but university is an increasingly popular option for much of the population. In 2009, university places were changed from fixed to demand-driven and, as a result, by 2015 the number of domestic students going to university had grown by nearly 30%. While numbers vary from year to year, currently more than three quarters of the class of 2017 is expected to apply for further education. But, before they do, they may choose to take a short break to refresh themselves after all their years of schooling, and to gain some experience and have a little fun before plunging back in to begin their degree.

What is a gap year?

While common in the United States, United Kingdom, and rest of Western Europe, for many years the notion of taking a gap year had negative connotations in Australia. A ‘gap year’ is time taken out of formal education; mostly it occurs between finishing school and taking up tertiary study, although some students take a gap during a course or between completing a qualification and seeking work.

According to research undertaken by the National Centre for Vocational Education Research (NCVER), the incidence of gap-taking by Australian students has increased – it is estimated that approximately 25% of Australian students that complete high school will take a gap year before they go on to further education. The most common activities of Australian gap students were part-time (28%) or full-time work (23%), training (10%), or travel (6%).

Because there are so many opportunities and experiences available to gap-takers, there are likewise, a range of benefits. These might include:

  • Time to identify and explore their education and career goals
  • Development of organisational and work skills
  • Undertaking non-university courses or training to support tertiary studies
  • Development of a broader world view, particularly among those students who go abroad for travel or volunteer work
  • Deferring and working is the only way that many students can qualify for Youth Allowance; students from regional areas who earn a designated sum during their gap year may qualify as independent and receive Youth Allowance during their studies.

A study by the University of Sydney found that gap-takers are often more motivated and successful in their courses, have wider interests, and are more easily able to socialise with a diverse range of people.

If the gap year experience is valued by prospective employers, the student may gain employment advantages – for example, where they gain relevant work experience, or combine travel and voluntary work, this can add to their skillset and increase their employability after university. Given the competition for jobs in the current environment, this can only be a positive thing.

Some gap year opportunities

Interestingly, fewer Australian students travel or undertake voluntary work, despite the benefits it can deliver. In many cases this will come down to financial reasons – either the student needs to work to save money for their university years, or simply does not have the savings to head overseas. For those with the means to travel, there’s a variety of opportunities they can take up, such as volunteering for projects across a range of countries and ‘themes’. These might include:

  • Teaching English to children and adults in developing nations
  • Working on an African game reserve to help conserve wildlife
  • Contributing to the lives of young Buddhist monks in Nepal
  • Building homes and schools in developing nations
  • Coaching sport
  • Working in childcare or undertaking medical internships.

So how can you help ensure you are able to support your children with their choice?

One strategy to fund a gap year experience is a regular investment plan using an investment bond. Regular investment harnesses the benefits of compound interest and dollar cost averaging; this enables your money to build up into a nest egg over time. While many managed investments have savings plans attached to them, investment bonds have a range of features that make them especially attractive to regular investors with a longer-term investment goal.

1. You can start small and add regularly: 

An investment bond can be initiated with as little as $500, and regular investments of up to a total of 125% of the initial investment can be made each year.

2. It’s a tax effective investment: 

An investment bond is a tax effective structure; tax is paid within the investment bond rather than personally by the investor. The maximum tax paid on the earnings and capital gains within an investment bond is 30%, although franking credits and tax deductions can reduce this effective tax rate.

There is no tax liability on maturation after 10 years, and no capital gains tax liability when switching between investment options. However, if necessary, the investment is accessible earlier; if redeemed within the first 10 years, the investor will pay tax on the assessable portion of growth as shown in figure one.

Figure one: Tax payable on returns from investment bonds

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3. There’s no need for annual tax reporting:

No one likes paperwork and, while your money remains invested, the manager of the investment bond will pay tax on investment earnings; there is no requirement for you to declare those earnings in your annual tax reporting.

4. You have investment choices:

Centuria’s investment bonds offer a choice of investment options:

  • Australian Shares
  • Balanced
  • Cash
  • Growth
  • Guaranteed.

Earnings are automatically reinvested in the bond and because investors have no capital gains tax liability, reinvestment dates do not need to be tracked for capital gains tax purposes. Investors can also switch between investment options without triggering personal capital gains tax.

5. You can nominate beneficiaries: 

Investment bonds provide you with the freedom to nominate anyone as a beneficiary in the event of your death. As an investment bond falls outside of the estate, it is not distributed according to the will, nor is it affected if the owner dies intestate. Once the ten-year investment period ends, or in the event of the death of the investor, the investment bond is paid tax-free to the nominated beneficiary/ies.

How does it work in practice?

Kerrie and Sam have two children in primary school and want each of them to have the opportunity to take a gap year, to see the world and contribute through voluntary work. They invest $1,000 to start a regular investment plan using an investment bond. Each month, Kerrie and Sam add $100 through a regular investment plan, and each year, the regular savings amount is increased by 25%.

Figure two: Growth in investment balance over 10 years

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Source: Centuria – figures assume investment returns of 4% income (70% franked) and 3% growth, and that the investment is held for 10 years. This example is for illustration purposed only and does not purport to represent the return achievable in any particular investment bond. Investments are subject to risk, including the risk of negative return. Changes to the assumptions given in the illustrative example will alter the outcome.

If the outcome in this example is achieved, Kerrie and Sam’s investment will have grown to a little over $49,000, tax paid, by the time their first child finishes school. That way, both of their children will have a funded gap year to explore the world and take up opportunities that will help them develop skills to benefit their future employment.

Saving and investing regularly over the medium to long term can grow into a sizable nest egg. Your children or grandchildren can benefit from the power of compounding returns and have a fund to support them during a gap year between school and university – or between university and starting work – and you can ensure they are in a position to make the most of every opportunity available to them.

 

Strategies to fund a gap year
gap year stdent travel
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Anonymous - It is not a bias to get a refund of over-withheld taxes. For once, Australia has a better tax system in this respect than most of the rest of the world.....
Anonymous - This is all identity politics rubbish. Inasmuch as most families are dual income earners and as most women are not in high paying jobs for a variety.......
Margaret - Happy that I won't be around in 2060....
Anonymous - This "analysis" is misconceived and should get a fail in statistics. Men pay more tax because they work more. So they should get more relief. And,.......