Investment Bonds and your Child’s Education

If you missed our explanatory article on investments bonds you can view it here - What are Investment Bonds?

Recent studies have shown that 45% of Australian families will choose to educate their children in a private school, but private school education comes at a cost.

It is estimated that only about half of parents can afford to pay for fees out of their disposable income. Many turn to credit cards, personal loans, extend their mortgages or call upon grandparents for assistance.

Futurity Investment Group Planning for Education Index has revealed that Brisbane is the most expensive city in Australia for Catholic education. These costs are adding up to around $154,000 across primary and secondary schooling.

Their research shows that over the course of seven years of primary education, the estimated annual cost of education for a child starting school in the public system in Queensland this year will average out to:

  • School fees: $210
  • Outside tuition: $2,050
  • Electronic devices: $513
  • Uniforms and textbooks: $369

For families sending a child to an Independent primary school in Queensland this year, while also meeting comparable ancillary expenses, the bulk of the amount spent on education will go towards tuition fees – an annual average of $10,192.

For families with children in the Queensland Catholic primary system, their research shows the average fee and “voluntary” contribution to be $2,411 per annum on top of ancillary expenses.

Want to see what it would cost based on your personal Circumstances?

Futurity’s Cost of Education calculator provides default figures derived from research to assist you with an estimate. As you use it you will have the flexibility to make changes to the figures depending on your child’s stage of schooling, school type and your expectation of likely expenses.

How can you ensure your clients have their choice of education options when the time comes?

The key is to have a plan, start early and consider an Education bond as a tax effective, flexible investment solution.

How can an Investment Bond Help?

Investment bonds are a tax effective way to save for the cost of education as they are a tax paid investment. This means the tax paid on investment earnings is paid at a tax rate of up to 30%. This is particularly attractive for high income earners with a marginal tax rate of up to 47%.

Compounding Interest is your new best friend 

Described by Albert Einstein as 'the most powerful force in the universe', compounding returns are the key benefit to starting early. Simply put, with compound returns, you will earn returns not only your initial investment, but also on the prior returns on your investment. This means that your total return grows exponentially the longer the time frame. The longer you can keep the investment untouched, the more your wealth will grow.

The surprising benefits of a regular savings plan
Education bonds are flexible investments offering you the ability to make regular contributions from as little as $100 per month. Setting up a regular savings plan is an easy way to grow your investment without even having to think about it. Add compounding returns into the mix and you'll be packing your children off to the best school before you know it!


Mary and John, Married lawyers, intend on sending their newborn son Max to the same elite private school John attended.

Max's school fees are expected to reach up to $50,284 p.a. by the last school year. They realise they must start the saving now so they initially invest $50,000 into an investment bond and start a monthly savings plan with the amount of $1,277 increasing that by 5% for the next 5 years.

Using the investment bond to fund Max's  school fees gives Mary and John significant financial advantage through tax savings compared to funding school fees out of regular income in today's dollars.

Although the investment bond has performed well and they have to declare the assessable portion of withdrawals during early years (6-10 inclusive), in their tax return their personal tax is very low due to the 30% tax offset they received in year ten.

They will only pay a total of $2,389 personal tax on their withdrawals over a period of four years and nothing thereafter.



The Case Study

Initial investment amount $50,000.00
Earnings 8%
Regular savings amount (monthly) $1,277.00
Marginal Tax Rate includes medicare 47%
Total cost of school fees $331,455
Total contributions $17,369
Bond year Opening balance Net earnings Regular savings amount School Fees Tax assessable portion of withdrawal Gross investor tax Tax offset available Net investor tax on marginal tax rate Net withdrawal amount Closing balance
1 $50,000.00 $4,603.94 $15,324.00 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $69,927.94
2 $69,927.94 $6,228.01 $16,090.20 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $92,246.15
3 $92,246.15 $8,044.75 $16,894.71 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $117,185.61
4 $117,185.61 $10,072.74 $17,739.45 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $144,997.79
5 $144,997.79 $12,332.14 $18,626.42 $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $175,956.36
6 $175,956.36 $13,697.03 $19,557.74 $15,000.00 $3,941.85 $1,852.67 $1,182.56 $670.11 $14,329.89 $194,211.12
7 $194,211.12 $14,384.88 $0.00 $15,000.00 $4,704.43 $2,211.08 $1,411.33 $799.75 $14,200.25 $193,596.00
8 $193,596.00 $14,335.68 $0.00 $15,000.00 $5,414.25 $2,544.70 $1,624.27 $920.42 $14,079.58 $192,931.69
9 $192,931.69 $14,129.50 $0.00 $17,000.00 $4,584.98 $2,154.94 $1,375.50 $779.45 $16,220.55 $190,061.18
10 $190,061.18 $13,899.92 $0.00 $17,000.00 $2,586.13 $1,215.48 $775.84 $439.64 $16,560.36 $186,961.10
11 $186,961.10 $13,575.45 $0.00 $18,000.00 $0.00 $0.00 $0.00 $0.00 $18,000.00 $182,536.55
12 $182,536.55 $13,221.58 $0.00 $18,000.00 $0.00 $0.00 $0.00 $0.00 $18,000.00 $177,758.12
13 $177,758.12 $12,303.71 $0.00 $25,000.00 $0.00 $0.00 $0.00 $0.00 $25,000.00 $165,061.83
14 $165,061.83 $11,001.30 $0.00 $28,750.00 $0.00 $0.00 $0.00 $0.00 $28,750.00 $147,313.13
15 $147,313.13 $9,251.71 $0.00 $33,063.00 $0.00 $0.00 $0.00 $0.00 $33,063.00 $123,501.84
16 $123,501.84 $6,967.81 $0.00 $38,022.00 $0.00 $0.00 $0.00 $0.00 $38,022.00 $92,447.65
17 $92,447.65 $4,047.69 $0.00 $43,725.00 $0.00 $0.00 $0.00 $0.00 $43,725.00 $52,770.34
18 $52,770.34 $372.40 $0.00 $50,284.00 $0.00 $0.00 $0.00 $0.00 $50,284.00 $2,858.73

Key Takeaways

Investment bonds are the most tax effective investment solution after super, with no restrictions on when you can access your funds.

Key Takeaways

The longer you hold an investment bond the more tax effective becomes

Key Takeaways

No capital gains tax on switching or when ownership of the investment bond is changed

Key Takeaways

Pay no personal tax on your investment if you make no withdrawals in the first ten years after that you can consider the tax on your investment bond paid

Think an investment bond is appropriate for you?

This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.

Whilst all care has been taken in the preparation of this material, it is based on our understanding of current regulatory requirements and laws at the publication date. As these laws are subject to change you should talk to an authorised adviser for the most up-to-date information. No warranty is given in respect of the information provided and accordingly neither Alliance Wealth Pty Ltd not its related entities, employees or representatives accepts responsibility for any loss suffered by any person arising from reliance on this information.

Posted in Financial planning, Investment.