Scholarship funds – and alternative strategies
What are Scholarship Funds?
Scholarship funds are structures specifically designed for funding childrens education. They 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 other managed funds there are fees charged on these products for maintaining the investments – and the provider makes the investment decisions. It appears that these funds have a higher proportion of ‘defensive’ assets such as cash and fixed interest than might generally be expected.
How do these funds work?
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. NOTE however, the rebates are only available if the funds are used for the specified purpose of education funding.
The tax benefits and structure can vary from plan to plan. Before making a commitment to a scholarship plan, documentation should be studied/ scrutinised in detail so as to gain an understanding of the particular features offered and to confirm that it will meet your particular needs.
What should I watch out for in a Scholarship Fund?
- Can be a tax effective way to prepare for funding childrens 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.
- 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 the usual timeframes are considered.
- 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.
Are there alternatives for funding childrens education?
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 financial decisions concurrent with education planning are anticipated: advice that will take into account financial resources available, the appropriate timeframe, some of the potential risk threats that might arise – and other personal circumstances.
Such an approach could lead to the suggestion of alternative strategies that offer wealth protection as well as wealth accumulation – and ensure access in the event that the education level provided for is not in fact embarked upon in due course.
Continuum Financial Planners Pty Ltd can help you decide.
Confident in the knowledge that – ‘we listen, we understand; and we have solutions’ that we deliver in personalised, professional wealth management advice, arrange to meet with one of our experienced advisers. Phone our office on 07-34213456; or use our website contact us facility – and be assured of prompt and courteous attention.
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.[This article was originally posted in March 2010: it has been updated and/ or refreshed from time to time, most recently, in March 2017.]