Investing in Children

Putting your children through school is often the second largest expense after a mortgage for many Australians, so it’s important to plan ahead.

Aside from school fees, there are regular expenses such as uniforms, equipment, and excursions that can affect your budget significantly, and with tertiary education these costs might be around for more than 15 years!

The average costs of secondary education for two children:

  • Public school: $60,000
  • Private school: $260,000

Getting started
You don’t need a lot to start investing for your children’s education, and by adding small amounts regularly over time the interest earned could see your initial investment become significantly larger.

You could consider:

  • Investing some or all of your Federal Government Maternity Payment;
  • Checking with the school to see if you can pre-pay school fees for years ahead – so you could save paying any fee increases later; and
  • Contributing regularly to secure your children’s financial future.

If you invest for long-term growth, it can also be a good way to teach your children about money as they grow up. So start early and ensure your children’s education as well as your own financial future.

Table 1 – The average costs of education

Public

Private

Childcare/pre-school (based on 48 weeks spent in childcare per year)
$3,600
$9,984
Primary School (7 years)
$2,000
$40,000
High School (6 years)
$5,000
$60,000
Further Education (based on a 4 year degree)
$20,000
$20,000
Potential expenditure
$30,600
$129,984

Source: aifs.gov.au

Planning ahead for education costs

You should know some of your options that might help you manage expenses.

1. Managed funds
Managed funds can be ideal for long-term growth of your savings, and you only need as little as $1,000 to start, and can make contributions each month – for example $100.

Benefits: By adding to your investment regularly, your initial capital and contributions can earn interest and continue earning interest over the years, so by the time your child starts school you will be financially prepared.

Consider this: Be careful in whose name you place your managed fund investment. In some cases it is better to set up the investment in your own name rather than your child’s, as children can be liable for higher tax rates (as much as 66% on earnings).

If placed in your name, earnings will be taxed at your Marginal Tax Rate (MTR). In this case, it might be better for the parent in the lower tax bracket to hold the investment. Seek advice in regards to your own situation.

2. Investment bonds
Investment bonds can be set up through insurance companies, or friendly societies, and even with as little as $500 to start, a savings plan can be set up which allows you to contribute regular amounts over time, to save for your child’s education.

Benefits: The benefits of investing in investment bonds are similar to that of managed funds. Your initial investment plus regular additions can earn interest over time so that your initial capital will build up over time.

Consider this: If the investment is placed under your child’s name, AND is also held for more than 10 years, the proceeds from the investment bond will be entirely tax free. Your Count Adviser can help you determine whether this strategy is suitable to your situation.

3. A Trust
Whether for your children or grandchildren, setting up a trust means that you determine in advance how you want your assets to be distributed in the future. Your appointed ‘trustee’ legally distributes your assets (or income from your assets) to those beneficiaries – who can be children or grandchildren. So for purposes of paying for your child’s or grandchild’s education, you can set up a trust to do just that – to benefit the children.

Benefits: Testamentary trusts can be a tax-effective way to distribute your assets, as all beneficiaries are taxed at adult tax rates, regardless of age, rather than higher child rates.

As the trust owns the assets, and not the beneficiary, parents or guardians cannot access your children or grandchildren’s education inheritance for alternative purposes, such as paying off debt. Also, for this reason the trust assets are generally protected from debt collectors – so in most cases you can rest assured that your money will be safe and go to where you want it to go – ie to pay for education costs.

Consider this: Usually a testamentary trust ‘runs out’ after 80 years, so consider whether this time frame is acceptable for your needs and the needs of your beneficiaries. Speak with your Count Adviser about setting up a trust, and about whether this is a good option for you.

4. Education Funds
Education Funds are similar to savings plans in the sense you make an initial investment and contribute more over time. Although these funds have been popular in the past, this option can have high fees and is very restrictive.

For example, if your child leaves school early, or does not end up going to university you may be charged a high exit fee or be otherwise penalised. They are also often set up for slow-growth, so might not be the best option for you to invest for education costs or be aligned with your risk profile. Speak to your Count Adviser about the best option for you.

5. Wealth Protection Insurance
Saving for your child’s education is obviously important, but protecting the savings you have is also important. Would your children be able to continue their education without your income?

Wealth Protection insurance is available as different options to protect your income, your life and also against any major illness or accident. For example, Income Protection will provide up to 75% of your income in the case of accident or illness – up until the age of 65. Cover such as this can help you continue to pay education fees.

Benefits: Even if you are only out of work (from an accident or illness) for a short time frame of a few months, insurance benefits can help pay the day-to-day bills as well as school fees and costs.

Consider this: While health insurance might cover the costs of medical bills, it won’t cover the loss of your income if you are unable to work for an extended time. It is important to think about future possibilities of how you would pay education costs (and everything else) if an unexpected event was to occur.

You and your Count Adviser can discuss different options, including income protection, and decide on the right level of Wealth Protection for you.