Over the next 25 years, SMSFs will be significant players in the biggest intergenerational wealth transfer in our history. With an estimated $3.5 trillion expected to be passed down to future generations over this period, it will put a premium on sound decision-making by those transferring the wealth to ensure its longevity and protection.
There will be no shortage of options about how this wealth can be used, however, for retirees seeking to make a long-term difference for their families, an education bond that contributes to their grandchildren’s schooling and tertiary education is worthy of significant consideration.
Education costs – primary, secondary and tertiary, both private and public – are spiralling. It’s estimated the cost of educating a child at a ‘free’ public school is about $70,000, a number that rises to nearly $250,000 for religious schools and approaching $500,000 for private schools.
The average Higher Education Loan Program (HELP) balance is about $25,000. No doubt many parents will pursue – and appreciate – financial assistance to educate their children, as will graduates looking to pay off their debt; an education bond is an excellent way to facilitate this.
These bonds are a long-term savings plan allowing for tax-effective saving and investing to assist with meeting education expenses. The capital is divisible between the investor and beneficiary, with the latter being able to receive income from the investment.
Like other investment funds, the money is pooled and invested in various asset classes, such as property, shares, fixed income and cash. Investors can choose from one of four investment options – sustainable, balanced, growth and high growth – as well as having the flexibility to switch between them.
Bonds can be owned individually, jointly, via a company, trust or deceased estate, or by a child aged between 10 and 16, provided they have parental or guardian consent.
If the beneficiary is under 16, the benefit can be paid to the policy owner, guardian or approved educational institution. If the beneficiary is 16 or over, they can receive the money directly.
Withdrawals from personal contributions can be made at any time and for any purpose, and are treated as a tax-free refund of capital, providing flexibility should funds be needed for unexpected events.
On the tax front, the fund is a unique type of investment product that falls under the Income Tax Assessment Act 1997.
Based on the current applicable tax rate, a tax deduction worth up to $30 for every $70 of earnings used to pay education expenses can be claimed. The tax benefits do not end there, with other advantages including:
- tax-free access to contributions for applicable purposes,
- tax deductions on withdrawals of investment earnings to pay education expenses,
- no requirement to declare income on your tax return during the life of the policy,
- the fund’s 30 per cent tax rate may be lower than your marginal rate, and
- a withdrawal of earnings is taxable to the beneficiary, not the owner.
The benefits of an education bond extend further than its tax treatment. Allowing grandparents – as owners of an education bond – to ensure this investment is used solely for that purpose, within that broad framework there is enormous flexibility about how the money is spent, including fees, uniforms, books, study materials, extracurricular activities, such as music lessons, HELP debt and accommodation expenses.
In the event of death, an education bond is excluded from probate and estate processes, and funds can be paid directly to the beneficiary. This can provide peace of mind for grandparents, knowing their wishes will continue to be honoured, especially where family relationships are strained and/or complex. An education bond also allows for the nomination of multiple beneficiaries, allowing for each grandchild to receive the same amount.
These bonds are no different to any other investment: they come with risks. This is why investors need to carefully consider the investment strategy selected, not only in terms of their own financial security, but how it will meet its long-term goal of financing the beneficiary’s education.
If this is done prudently, then these bonds can be a tax-effective investment tool that can help lay the foundation of a secure financial future for succeeding generations. As Benjamin Franklin wisely said: “An investment in knowledge pays the best interest.”
Emma Sakellaris is chief executive of Foresters Financial.