EDUCATION FUNDS – ARE THEY WORTH IT?

A lot of my clients are either new parents or are planning on becoming new parents in the near future. Because my clients are amazing people who are taking charge of their future, a common question I get from them is how they can best save for their children’s education. Now this may seem like a silly question at such an early stage but for a lot of people who leave this to the last moment, they can find themselves in a financial position which doesn’t allow them to have the choice regarding their children’s education.

With skyrocketing fees for both private and public schooling, having a solid financial plan early on will ensure that you have the resources to weather those expensive years of school fees, uniforms, school books…. and the list goes on and on!

So, back to the point, what is an education fund? There are limited products on the investment market which are referred to as ‘education funds’. The oldest one is the ‘Australian Scholarships Group’ (ASG) education funds which are designed to assist with secondary and post-secondary costs. There are also other limited products on the market but they are all quite different in their approach. For today I am just going to focus on ASG’s offerings.

As with all financial products, the key document you should always look for is the Product Disclosure Statement (PDS). ASG have 3 distinct products which are all accompanied by a PDS explaining the product. To save boring you, I will comment only on the Pathway Education Fund.

PATHWAY EDUCATION FUND (PEF)

The PEF allows you to make contributions to a member account which may be either regular, lump sum, or a combination of the both. Contributions are capped at $500k and the minimum account balance is $1,000 to be achieved within the first 2 years of enrolment.

The PEF will then invest your funds in accordance with a conservative balanced risk profile at their discretion. There are no options for other strategies and the investor has no say in the investment allocations.

When withdrawing your funds, if the investor wishes to claim a tax benefit, the request for withdrawal is required to meet ASG’s Education Benefit criteria and evidence needs to be submitted at the time of the request. You may only make a request for withdrawal four times during the calendar year and the minimum withdrawal amount is $500.

So why are there so many rules? Because the PEF has been established with the sole purpose of providing benefits for education, it qualifies as a ‘scholarship plan’ under tax law. This means that whilst tax is paid in the fund on earnings at the company tax rate (currently 30%), the investor is not required to pay tax at an individual level. For those in high tax brackets this may seem quite attractive. In addition, if you use the earnings for education related expenses, the amount is increased by a tax benefit because ASG can claim a tax deduction for this.

However, if you attempt to use these funds for non-education benefits, they are subject to insurance bond rules. These are complex and I will explain them in a later post.

When you wish to withdraw from your member account, the tax rate will be dependent on a number of factors including whether you are simply seeking return of your net contributions or whether you are withdrawing for an education benefit. If you are withdrawing for an education benefit, the tax rate will be based on the nominated beneficiaries tax rate (i.e. your child). It should be noted that children under 18 have very different tax rates to adults which can be prohibitive in some circumstances.

So what are the fees? Among others there is an enrollment fee, an annual administration fee and management costs. For up to date fees you should consult the PDS. There are also additional fees which may affect you including a withdrawal fee if you wish to make an unscheduled withdrawal outside of the four scheduled periods per calendar year.

If your child finishes their education the amount may be returned to you. It should be noted however that the earnings will be assessed as a non-education benefit and will therefore be subject to the insurance bond rules. Alternatively, you may nominate another child who has not yet finished schooling.

So is it worth it? Well as always this will depend on your particular circumstances. This is obviously an investment which is quite restrictive in nature. Your choices regarding the investments within the product and the ability to withdraw are quite limited. Further, the tax benefits need to be weighed against the fees, risks and the opportunity cost for other uses of those funds. There may be some clients who see that the tax benefit far outweighs the restrictive nature of the investment and feel that this is a great product for their needs.

This is obviously a very high level overview of this product and does not even begin to scrape the surface in explaining it. If you wish to find out about it I would recommend you seek advice (hopefully from us!) or at the very least, obtain a copy of the PDS to make your own decision. This is one of an unlimited amount of products available to you that will assist you to achieve your financial future. By booking an appointment with Bounce Financial today, we will be able to discuss your financial goals and personal needs and provide you with a key set of recommendations to achieve these goals. In addition, we can provide ongoing advice where we monitor your investments and meet regularly to adjust, review and make further recommendations.

I sometimes get asked “why do I need a financial adviser? I know how to deal with my money.” This is a reasonable question and I think it is one that arises because many people think putting money in a bank account is all you need to do to get ahead. I hope that through these blogs, it will help you to understand there are a whole world of investments out there to help you achieve your goals and the first step is to get good financial advice to set you on your way.

As always please feel free to leave any questions below or if you wish to discuss in private, contact me at [email protected]

This post is from our resident Financial Planner Cara Brett, check out her details in the About Us section.

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Posted in: Cara BrettFinancial Planning

About the author: Cara Brett

Cara Brett proudly heads up Bounce Financial - founded in 2014 after a successful, decade-long career in the financial services industry. Cara’s experience encompasses both the financial product and financial advice sides. This gives her a comprehensive and holistic knowledge of all facets of financial planning.