Ask an Adviser - How To Save For Private Education

Top answer provided by:

Matt Neill

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Firstly, I wish to congratulate you on the decision to send your daughter to private school and firmly believe the investment in your daughter’s education will pay dividends for her future.

In general the decision to put aside regular monthly amounts is a good one, this will allow you to avoid a shock when you receive your first invoice payable from the school.  I have always found with my clients, of all ages/ demographics, understanding your ability to save and doing this regularly is key to wealth creation.

By adopting a regular savings program into ‘growth’ assets you will benefit from what we call in the industry ‘dollar cost averaging’, meaning you benefit from buying into the sharemarket at different price points, which can ultimately lower the average buy-in price for your regular investments – which can lead to larger gains in the future!  The alternative is a once off lump sum, which can lead to market timing playing a more significant role in the outcome at the finish line and requires an initial outlay which may not be an option for you.

As far as options for saving for your child’s education, the options outlined are certainly strong, however it’s important to draw the distinction between tax structures and investments.  Take the example, investment bonds and managed funds, an investment bond is a tax structure, like a company, trust or super fund.  An investment bond is subject to different tax rates and rules, such as being taxed internally at a rate of 30% on earnings, and if held for over 10 years offering concessional treatment for capital gains tax.  Given this is the case and the decision for an investment bond, may primarily concern tax, you should consider the average tax rate of the lowest income earner in your household and compare.  I sometimes find that by simply investing in the lower income earners name, this leads to a lower tax bill than an investment bond at 30%.

Managed funds can be owned via any of the tax structures mentioned above.  The benefit of these investments is they provide access to a professional manager, who is in charge of making investment decisions with your funds for the mutual benefit of all unit holders of the fund.  They offer significant amounts of ‘spreading of the eggs’ which lowers the risk of your investment providing negative returns over the long run.  You should consider fund manager fees, which can vary due to the style they adopt, such as passive or active.  A manager with an index style is considered passive and they charge comparatively lower fees to active managers, and they simply aim to mimic a benchmark index i.e. ASX 200.  An active fund manager will invariably charge more for their services, but will aim to beat the benchmark index and provide a higher return.  According to differing schools of thought and who you read, they may or may not do this consistently.  Perhaps you could consider combining these styles for an overall allocation of 60-70% growth assets, as this may further diversify your portfolio?

You may also wish to consider paying down any existing personal debt, such as your home mortgage, which can allow you to redraw your funds at a later date when schools fees become payable.  The reason this option may be suitable is to the inability to claim a tax deduction on any interest paid on debt for ‘personal use’, the family home is an example of this. 

I would make the suggestion that all Australians at least seek a second opinion with an appropriately qualified financial planner, before making significant financial decisions, if for nothing else than be clear on all available options and the pros and cons.

Take care,

 

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Article by:

Tom from Melbourne

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