A great way to funding your child’s (or grandchildren’s) education
Having children is an expensive exercise! The cost of educating them can be a large portion of their expenses and a common concern for many families is how best to plan for the cost of their children’s private education.
Most are aware of the existence of education savings plans however they lack flexibility and come with limitations.
Some clients prefer to keep things simple and put extra repayments into their home loan and then use a redraw facility but this approach takes discipline.
Another popular choice is an investment savings bond as it provides, flexibility, tax benefits and a simple structure.
Investment Savings Bonds have also had a makeover, they now provide greater investment choice which means you can adopt an investment strategy that is consistent with your preferences and risk tolerance.
So how do they work?
An investment bond is a type of insurance contract which means there is the bond owner (investor) and a life insured (which can also be the bond owner). Investment bonds are extremely attractive to high income earners as they are tax-paid investments, meaning tax is paid by the issuer of the bond and earnings are not required to be included in your personal tax return. For this reason, they are popular in Family Trusts where members may want to reduce the level of distributable income. After 10 years any withdrawal from the bond paid to the beneficiary will be tax-free, regardless of their marginal tax rate.
Investment bonds have been designed to be held for at least 10 years in order to provide the optimal tax benefit. However, you can access the funds at any time.
The 125% rule
You can commence your bond with as little as $1,000 and no limits on the amount you can invest in the first year. In each subsequent investment year, additional contributions of up to 125% of the previous investment year’s total contributions can be made without re-setting the 10-year advantage period. Regular savings plans can be established and automatically increased to make optimal use of the 125% rule.
You can nominate an age when the bond will transfer (known as “vesting”) to your child (or grandchild) between the age of 10-25. The investment is not subject to stamp duty or capital gains tax and is transferred to the child in full. Importantly they can choose to use the funds for any purpose, be in educational or otherwise.
As with all investments, we recommend you seek advice to ensure this type of investment structure is suitable to you, your goals and circumstances.
This information contained in this document has been provided as general advice only. The contents of this document have been prepared without taking account of your personal objectives, financial situation or needs. You should, before making any decision regarding any information, strategies or products mentioned in this document, consult with your GPS Wealth Ltd financial adviser to consider whether it is appropriate having regard to your own objectives, financial situation and needs