P>Paying off the mortgage is one of the best ways to save for your children's school fees, according to financial planner Kevin Bailey. Other options include superannuation contributions, long-term agricultural investments, building up a business and then selling it, and insurance bonds.

It's not the standard advice for saving for a child's education, which usually centres on managed funds or special-purpose education funds such as those offered by Australian Scholarships Group.

Mr Bailey, the managing director of The Money Managers and the father of six children aged between 1 and 13, has put his money where his mouth is. He has paid down his home mortgage and sold some of the equity in his financial planning business to his partners.

He says tackling the task of saving for your children's education is similar to tackling other investments. It is a matter of balancing risk and return and thinking about the time frame.

Some parents send their children to a public primary school and then a private secondary school. Under that scenario, the big fees will hit when the child is 11 or 12, giving parents a 10-year savings time frame, if they start early.

"For that time frame, you really shouldn't be investing in conservative sectors such as cash or fixed interest," Mr Bailey says. "They are suited to a much shorter time frame."

Mr Bailey says growth assets such as Australian and international shares and property are much more suited to a longer investment period as their volatility evens out over time and they generate the highest long-term returns. On that basis, it sounds like the best option is to stick as much money as possible into a managed fund, such as a balanced fund or index fund.

Not so fast, says Mr Bailey.

"Look at the tax situation. Most people pay at least 30 per cent tax, which means a return of 10 per cent is really 5 to 7 per cent after tax."

Putting investments in the children's names is not an option, as the government has a penalty tax regime to prevent this. Children's investment income of more than $625 a year is taxed at 66 per cent, so a nest egg of more than about $10,000 is not tax-effective.

Mr Bailey says the most tax-effective option is to pay off the mortgage, which probably costs about 7 per cent in after-tax, non-deductible dollars. "Paying off the mortgage is effectively generating a risk-free return of 7 per cent," he says. "You can't get a risk-free return that high anywhere else."

The theory is that parents pay off the mortgage, then draw down against it later when they need cash for school fees.

Mr Bailey acknowledges that many people are not disciplined enough to pay the mortgage and not touch the draw-down facility except for school fees.

But he urges parents to consider the idea, especially when receiving single-digit returns, when fees on financial products and tax can eat up most of the profit.

Another tax-effective option for older parents is to pour money into superannuation, then withdraw some of it at age 55 to pay school fees.

Mr Bailey uses the example of a woman who has a baby at 40 and plans to retire by the age of 55, when she can withdraw up to $100,000 tax-free.

He also says high-income couples who have paid off their mortgage may consider a legitimate agricultural investment such as a pine-tree plantation.

"You get a tax deduction when you make the contribution, then you can't touch it for

10 or 15 years when it is harvested and you get a large amount of income," Mr Bailey says.

Mass marketed tax-driven investment schemes have attracted substantial amounts of negative publicity in recent times. This was because some schemes failed, and investors in others had tax deductions disallowed by the Australian Tax Office after scheme promoters flouted the conditions of their Tax Office ruling.

Although some of these tax-driven investment schemes have been a bit dodgy in the past, Mr Bailey says several ratings agencies, as well as the Tax Office, now scrutinise the plans, and about three or four a year have good investment prospects.

A final option is insurance bonds.

Mr Bailey says these fell out of fashion during the 1980s with the rise of managed funds and the demise of insurance salesman but they are starting to come back into fashion, especially for high-income couples.

In basic terms, the insurance company pays tax at 30 per cent on the investment and if it is held for 10 years no further tax is payable when it is redeemed.

"You have to think outside the square and be a bit innovative," Mr Bailey says.

"Look at the tax and look at the time frame."

For those wanting something a bit more conservative, a popular option is the secondary school benefits program offered by friendly society Australian Scholarships Group.

ASG, which was established in 1974, represents 300,000 parents with $1 billion under management.

Parents make regular contributions into a fund, then receive their capital back (less charges) when their child is in years 7 to 9. The earnings on the invested capital are paid out when the child is in years 10 to 12.

Parents choose different levels of contributions, ranging from $10 to $100 per week. ASG spokesman Jack Lloyd says the investment will not completely cover school fees but the earlier parents start, the more they will receive.

For example, if a parent begins paying $10 a week for their three-year old, they will receive $8500 back over the six years the child is at secondary school. If they pay $100 per week, they will get $88,400. But $100 a week from birth will net them $158,000.

ASG's investing style is conservative. In the past, it has mainly invested in fixed-interest securities. Since February last year it has broadened its investment mix to include Australian and international shares and property, using a conservative balanced approach.

The fund's projected gross return rate is 8 per cent a year and Mr Lloyd says the tax treatment is more beneficial than many other products. Although the fund must start paying tax at 30 per cent from July 1 (previously it was zero), he says it will only have a marginal effect on parents' returns because of imputation credits.

If the unthinkable happens and a child dies, Mr Lloyd says the parent receives a full refund of their contribution, but the earnings on the money is not paid out because the child cannot receive them.

The same applies if a child drops out of school before year 12.