Following on from last week’s blog on saving for your child’s education, we look at an additional option – Investment Bonds.
Investment Bonds can be a flexible and tax-effective way to invest for big-ticket items for your children’s future – such as their education.
Before we discuss the pros and cons of Investment Bonds for your kids, let’s start with the basics.
What is an Investment Bond?
Investment Bonds allow you to invest on behalf of your child. You can transfer ownership to your child at a date in the future – such as for their education, a house deposit, wedding, car or the like.
Investment Bonds are accessed via life insurance companies and are a combination of a life insurance policy and an investment portfolio.
They are available across a range of options including shares, property, bonds, infrastructure and mixed-asset portfolios.
What education expenses do they cover?
Investment Bonds can be used to cover the expenses for a range of education including primary, secondary and tertiary education including tuition fees, textbooks, materials and other expenses.
Do they cover all schooling?
Yes, they can be used for private, Government and religious school fees.
Is there an age limit my child needs to be?
No, you can transfer ownership to your child at any time once they have reached their nominated (vesting) age.
Can I change the bond to cover another child?
Yes, the flexibility of Investment Bonds means you can change the nominated child/student at any time.
Do I pay tax on the Investment Bond?
Yes, however, the tax on investment earnings is capped at the company tax rate of 30%. If you leave your Investment Bond for a period longer than 10 years, you do not need to include in your personal income for tax purposes. You will therefore not pay additional tax or Capital Gains Tax on its earnings.
Investment Bonds are an alternative way for parents, grandparents or significant others to lend a helping hand to their families to save for a quality education.
What are the Cons of Investment Bonds?
Traditionally, Investment Bonds have not faired as well as other investments (such as EFTs). The average rate of return sits at approximately 4.7% – lower when compared to similar EFT investments of around 10%. There can also be higher management fees related to Investment Bonds.
Additionally, if you withdraw the funds prior to the ten-year mark, you will lose the aforementioned tax savings and may be liable to Capital Gains Tax.
Get in touch with our team if you’d like to discuss the various strategies to save for your child’s education.
