Doctors, like other parents, want the best for their children, which includes a good (private) education. However, this is becoming quite expensive, as the cost of education is rising exponentially compared to the broader consumer price index. Unless you are certain that you will be able to fund these expenses from your cash flow, it is best to start planning for school fees early, as it is not going to get any easier or cheaper. Yet, anecdotal evidence suggests that less than half of all Australian families properly plan for this. It is important to understand that there is no single strategy that is optimal and will work for everyone. In this article I will look at a few funding strategies and options for doctors and school fees.
Many of my doctor clients are able to fund all or part of the school fees from their cash flow. I often find that one spouse’s salary or income is allocated to this particular cost.
2) Prepaying school fees
Whilst not all schools will offer this option, it may be a good opportunity to limit the impact of rising school fees, as they generally go up at a higher rate than inflation. You essentially lock in the cost today. However, prepaying fees also comes at an opportunity cost, as the funds could have been applied elsewhere, such as paying off your mortgage for example.
3) Paying off the mortgage
Paying off your mortgage may provide one of the highest risk-free returns you are able to achieve. By paying off more than the minimum repayment now, you are creating a reserve in an offset or redraw account, which you may call upon later when you need to pay school fees.
4) Insurance bonds
An insurance bond is a type of managed fund investment that is ‘tax-paid’. This basically means that the investor is not personally taxed for any income or gains whilst owning the bond; instead, tax is paid at 30% within the bond itself. The final distribution is tax-free if the bond is held for more than 10 years, and if during that time you did not contribute more than 125% of the previous year’s contribution. This may be a good investment option for parents whose marginal tax rate is higher than 30% (i.e. most doctors would be in this position); however, you need a long-term timeframe if you want to maximise the tax benefits. There are also investment-related fees applicable to these products, so you will need to consider that.
5) Education bonds and plans
Education bonds are very similar to insurance bonds. Each plan has a ‘sponsor’ (e.g. parent) and a ‘student beneficiary’. The main difference is that they are specifically designed to fund education expenses and offer some additional tax benefits. Each plan has two different accounts: • A contribution account; and • An earnings account
Funds in the contribution account (i.e. capital you contributed) can be accessed tax-free for any purpose; funds in the earnings account (i.e. investment income and growth on the capital) when accessed, are taxed at 30%. However a deduction is available to the fund that effectively reverses the 30% tax if it is used to pay prescribed education expenses (uniforms, travel expenses, course materials, etc). However, the earnings that are used to fund education expenses will still be assessable to the student at their marginal tax rate, which could be a penalty rate if you are a minor. Hence, these products are generally more attractive for tertiary education, as students over 18 have the benefit of being eligible for the tax-free threshold. As with insurance bonds, investment fees apply with these types of products.
6) Regular savings and investments
Insurance and education bonds are quite restrictive and complex, and some people may prefer to have more flexibility and control over their children’s education funds. Also, more favourable tax outcomes may potentially be achieved with other strategies, depending on your personal circumstances. Indeed, regular savings or investment plans may be a suitable alternative. You control when and how much you invest, into which assets, and when and how much you access. The ownership of the account or the asset will be a critical decision, not only from a tax point of view, but also in terms of asset protection.
It should be obvious that there is no ideal solution to fund school fees and that every family’s circumstances will be different. If funding your children’s education is an important goal for you, you should seek financial advice sooner rather than later and start planning for the funding of it, as it is a serious financial commitment. Please feel to contact me on 0432 885 295 or email@example.com to discuss your personal options.
About Yves Schoof
I specialise in medical financial planning and coordinating the financial affairs of medical professionals. I have been recognised as one of the Top 10 financial planners in Perth and Australia. I am a Certified Financial Planner and member of the Financial Planning Association of Australia. As I understand your time is extremely valuable and scarce, I am able to offer flexible meetings times, including outside business hours and during the weekend. I can even come and meet you somewhere convenient, or talk via videoconference on Skype. My first consultation is free. I allocate up to 90 minutes to discuss your personal circumstances and to establish how I may best assist you. Where you already have an existing adviser, I would be happy to offer a second opinion. I always quote a fixed dollar fee before we start working together. Please contact me on firstname.lastname@example.org or call me direct on 0432 885 295. You can follow me on Twitter @YvesSchoof or connect with me on Linkedin to receive new articles.
Yves Schoof and Affluence Private Wealth are Authorised Representatives of Synchron, AFS Licence No. 243313. The information posted is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making a decision.
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