Education, Investments

An avenue for intergenerational assistance

Education bond SMSF

There is a sound avenue worthy of consideration that will allow retirees to provide financial assistance for the education of subsequent generations.

Over the next five years, it’s estimated nearly 700,000 baby boomers will begin retirement, representing the first retiring generation that can expect to live a full, healthy life for multiple decades after concluding their working lives.

Many in this generation have enjoyed either free tertiary education (courtesy of the Whitlam Labor government, which abolished fees in 1974) or commonwealth-funded scholarships and have then used their qualifications to secure well-paying jobs in a strong labour market. At the same time, they could afford to enter the property market and are now the main beneficiaries of significant house price growth since the 1980s.

It means two things. Having seen first-hand the value of a good education, they place a premium on it. Secondly, many have enjoyed the superannuation guarantee for more than three decades, so, when combined with home ownership, they are financially secure. And in many instances, they will use a trusted accountant to advise them along this journey, especially if they have opted to run their own SMSF.

What many will want to do now is secure their legacy, that is, to do their utmost to help their families facing an uncertain future. Financially assisting with the educational costs of their grandchildren, and even great grandchildren, for schooling or tertiary education seems an obvious option.

Certainly, the financial need is pressing as educational costs for primary, secondary and tertiary learning rapidly increase. It’s not just elite schools. It’s estimated the cost of educating a child at a ‘free’ public school is about $70,000. For religious schools, that number rises to nearly $250,000 and for elite schools it’s approaching $500,000.

However, it’s not just primary and secondary education that is expensive. The average Higher Education Loan Program (HELP) balance is estimated to be $25,000, a crippling burden for many young people starting their working lives. Indeed, the deleterious impact on graduates was recently acknowledged by Prime Minister Anthony Albanese when he flagged an overhaul of the system. Whatever the outcome of that review, the need to tap grandparents on the shoulder for a helping hand seems unlikely to diminish.

So, how best to give this financial assistance? One option is an education bond, which is a long-term savings plan that allows for tax-effective saving and investing to meet education expenses.

Your accountant can provide details on how they work to ascertain whether the product is suitable. It is a discussion worth having as these bonds are one avenue for leaving an educational legacy.

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 younger than 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 can be made as one-off amounts or as regular payments.

This structure can provide grandparents with the assurance their investment is being used in line with their wishes and the designated purpose. However, there is also significant flexibility about how the money is spent, be it on fees, uniforms, books, study materials, extracurricular activities such as music lessons, HELP debt and accommodation expenses.

No different to other investment funds, the money, involving a minimum investment amount of $500, is pooled and allocated to various asset classes. There is also the option of choosing the investment strategy aligned to the investor’s risk appetite and objectives, whether that be sustainable, balanced, growth or high growth.

For tax purposes, the fund is subject to 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.

Other tax benefits include 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 an individual’s marginal rate and a withdrawal of earnings is taxable to the beneficiary, not the owner.

In the event of death, an education bond is excluded from probate and estate processes and can be paid directly to the nominated beneficiary.

For grandparents, it’s hard to imagine any greater legacy than supporting access to education. And the fact these bonds can have multiple beneficiaries, allowing for each grandchild to receive the same amount, is just a bonus.

Emma Sakellaris is chief executive of Foresters Financial.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital