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How can I prepare to pay for my grandson'€™s school fees?

I have a self-managed super fund, am in my early 50s and have recently seen my first grandchild born. I would like to help my kids as they are working hard and trying to pay off a house and the plan is for my grandson to go to a private school by Year 7. I would like to help them with the fees. What ideas do you have? I could put aside about $3000 a year pretty easily. What do you think of these school funds out there?

They are OK for some people but I have heard some conflicting reports. I reckon one idea would be to take your $3000 and buy an ETF for the S&P/ASX 200 index and add to it each year. By the time your grandson hits age 13 – that’s Year 7 – there would be $39,000 of capital and then you would hope that the market would have given its usual 10 per cent return per annum over a 10-year basis. Even if it were seven per cent, it would be a big help in paying the school fees.

Of course this has risks associated with it and so maybe you could split it 50:50 between term deposits and the market. You would still have $39,000 worth of capital provided we don’t get another GFC! You also could go to an adviser but that would mean fees that would eat into the ultimate return and then there are the education funds. Provided you do it inside your SMSF, you will be taxed at a lower 15 per cent and by the time your grandson hits school you could be totally retired and not paying any tax on your super withdrawals or your earnings on the $39,000. Let’s hope no government changes the super rules.

Finally get an idea of the school and the current fees and then work out the future fees by assuming a seven per cent increase each year. If the fees are really steep, you might need to sock away $5000 a year but if it proves too much, you can pocket the balance. It could be a bit too high but at least you are ready for a worst-case scenario.

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Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, January 27, 2012

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