Scholarship funds – and alternative strategies
What are Scholarship Funds?
Scholarship funds are structures providing funding for children’s education. These funds are managed investment structures –
- the pooled contributions of investors, combined with
- investment returns,
fund children’s future education costs.
Friendly societies are the traditional providers of these vehicles.
There are fees payable to the managers of these products for maintaining the investments. Typically, the fund provider makes all investment decisions. These funds tend to have a high proportion of ‘defensive’ assets such as cash and fixed interest in their portfolios.
How do these funds work?
Scholarship fund providers usually stipulate the level of contributions required, basing their calculation on the age of the child. Annual contributions to these funds can be –
- fixed for the investment term, or
- annually increased by a fixed percentage.
Their structure takes advantage of government tax incentives relating to education funding. The tax incentive savings pass to the owner/sponsor via a tax rebate on the investment earning. NOTE: Utilising these funds for the specified purpose of education funding secures the tax rebates.
The tax benefits and structure can vary from plan to plan. Before making a commitment to a scholarship plan –
- a detailed study/ scrutiny of the documentation, and
- an understanding of the particular features offered,
should confirm that it will meet your particular needs.
What should I watch out for in a Scholarship Fund?
Advantages
- Can be a tax effective way to prepare for funding children’s education costs.
- Using proceeds for education expenses, facilitates recovery of tax paid (up to 30%) on investment earnings.
- Investment earnings are payable to the student for education purposes, and
- the contributions can be returned to the investor or parent.
Disadvantages
- Not eligible for the 50% CGT discount on assets supporting the fund.
- Investments made tend to favour non-growth type assets such as fixed interest.
- A greater proportion of assets could be allocated to growth assets like shares and property considering the usual timeframes.
- The beneficiary child needs to go on to relevant education/studies to secure the earnings and/or tax concessions.
- Inflexible in regard to investment choices and contribution levels.
- Can be relatively high fee products.
Are there alternatives for funding children’s education?
A strategy for funding children’s education, in isolation from other financial goals and objectives, may not always yield the most satisfactory outcome. We recommend seeking advice where financial decisions concurrent with education planning are anticipated. Such advice should take into account –
- financial resources available,
- the appropriate timeframe,
- 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. It would also ensure access in the event that the education level provided for is beyond eventual requirements.
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 an appointment with one of our experienced advisers, by –
- phoning our office on 07-34213456; or
- at your convenience, use the linked Book A Meeting facility.
We acknowledge the contribution from Deutsche Bank through its Desk Caddie for the core content of this article, to which we have added further information.
(This article was originally posted by us in March 2010. It has occasionally been updated/ refreshed, most recently, in February 2025.)
