$804,000. That is the cost to put two children through one of Sydney’s top private schools.
To save for it, most people use one of four common options:
A savings account
Advantages: You can take the money out early if you need it, and you know almost exactly how much will be in the account year by year. It can be beneficial for motivation to see a separate account earmarked for a specific goal.
Disadvantages: You will be taxed on interest. You, your spouse and your child all probably have different tax rates – so consider putting the account in the name of the lower income earner.
Your money will grow at an inflation-like rate, which may be slower than the rate at which the school is putting up their fees.
A mortgage offset account
An offset account does not accrue interest but rather reduces the interest you pay on your home loan.
Advantages: This tactic provides a reasonable rate of return with very low risk.
Disadvantages: You often need to maintain a spreadsheet showing how much you have saved towards your various goals. When all the money is in one pot, it becomes very easy to rob Peter to pay Paul and not end up saving what is required.
An investment account
Unlike a savings account where your money is available on call, an investment account is invested in property, shares and other assets. Examples are managed funds, and wrap/portfolio service accounts. They are much like superannuation without the tax benefits and access restrictions.
Advantages: It’s likely (although not certain) to provide more growth than a normal bank account or offset account over the longer term.
Disadvantages: The tax implications are more complex, potentially involving capital gains and franking credits. The returns are volatile and somewhat unknown in the short term. As you get closer to paying for school, this volatility can be an unacceptable risk. You will pay fees for these investments.
An education (insurance) bond
An insurance/investment bond is a specialised investment account that may mean you pay less tax. It’s like an investment account in that returns may attract tax concessions if you hold the bond longer than 8 years (10 years for maximum tax benefit). You cannot put in more than 125% of last year’s contribution without re-setting the 10 year counter. Read more about the rules at this Australian Government site: moneysmart.gov.au/investing/complex-investments/investment-and-insurance-bonds.
Advantages: If structured in specific ways, the income for the investment within the bond does not go on your tax return. Given your tax return drives some Centrelink payments such as Family Tax Benefit and Child Care Subsidy, you may have a more favourable Centrelink income test. The money in the bond can be invested in property, shares or other assets to get a greater rate of return beyond cash.
Disadvantages: You will pay fees, which vary widely between bond providers. It may take some weeks to access the money. If you need to withdraw some of your money before a 10-year period, some or all of the tax benefits will be lost.
When you save matters
If you have strong discipline, saving for retirement ahead of school fees can result in a dramatically higher retirement nest egg. Here’s an example:
Family A saves $100,000 from 2020 to 2030 to pay for school fees. From 2030 to 2040, Family A saves an additional $100,000 for their retirement.
Family B reverses this. In 2020-2030, they save and contribute $100,000 to their retirement plan. In 2030-2040, they then save $100,000 for school fees.
Compound interest can leave family B with up to an additional $500,000 at retirement, because they had money in their retirement plan for an extra 10 years in comparison to family A.
This article is general advice only and does not take into account your personal needs or situation.
About The Presenter
Matt has been helping QLD Health Employees setup their salary packaging correctly for the last 12 years. As a licensed financial planner we are paid by you to give you advice that is in your best interest. GPA Financial Planning does not accept commissions or kick backs from salary packaging or lease providers.