Scholarships funds

Written on the 11th of March 2010 by Continuum Financial Planners Pty Ltd

Scholarship funds are managed investments, where contributions from parents and/or relatives are pooled to help save for a child’s future education costs. They are usually only offered by friendly societies.

Like managed funds there are fees charged on these products for maintaining the investments – and the provider makes the investment decisions. There is a wide variety of funds, but the majority have a higher proportion of ‘defensive’ assets such as cash and fixed interest.

Usually, a scholarship fund provider stipulates the level of contributions that need to be made depending on the age of the child. These contributions are fixed for the investment term or increased annually by a fixed percentage. They are structured to take advantage of government tax incentives relating to education funding and these savings are passed on to the owner/sponsor via a tax rebate on the investment earning. However, the rebates are only available if the funds are used for the specified purpose of education funding.

Note that the tax benefits and structure can vary from plan to plan…and there are a variety of plans available in the marketplace. Before making a commitment to any particular plan, documentation from all being considered should be studied so as to gain an understanding of the particular features offered.

Advantages

Can be a tax effective way to save for children’s future education costs. If proceeds are used for education expenses, it allows recovery of tax paid (up to 30%) on investment earnings.

Investment earnings can be paid to the student to meet education expenses, while the contributions can be returned to the investor or parent

Disadvantages

Not eligible for the 50% CGT discount on assets supporting the fund

Underlying investments are typically skewed to non-growth type assets such as fixed interest. A greater proportion of assets could generally be allocated to shares and property when you consider the time frame involved.

Earnings and/or tax concessions may be lost if the child does not go onto relevant education/studies.
Inflexible in regard to investment choices and contribution levels.

Can be relatively high fee products

When contemplating a savings plan for the future costs of educating children, a strategy in isolation from other financial goals and objectives may not always yield the most satisfactory outcome. We recommend that advice is taken in any situation where there are likely to be financial decisions to be taken concurrent with education planning.

To best explore your needs and possible solutions contact us to arrange a meeting with one of our experienced advisers.

We acknowledge the contribution from Deutsche Bank through its Desk Caddie for the core content of this article, to which we have added some additional information.