It’s natural to want the best for the children and grandchildren in your life. They’re growing up in a world that’s changing fast, and in some ways it’s an uncertain future. Luckily, there are a number of ways you can set your kids up for a more secure financial future.
In this article, we look at five different types of products that families use to prepare their kids for the future. We weigh up the pros and cons and give you some tips for how to choose the right investment for your family.
Get started by setting a goal
Before you dive into opening an account for your child, it’s important to think about the goal you want to achieve. For example, do you want to help your child buy a car when they turn 18, or are you saving for their education? Once you’ve decided on a goal, you can then determine the time frame for achieving the goal – if it’s buying a car when they’re 18 and they’re a toddler now, you’d have almost two decades.
Consider how you feel about risk
It’s important to think about how you feel about risk before you go ahead and choose an investment. Risk is positively correlated with return, which means the greater the risk, the greater the potential return, and vice versa - however, it’s important to remember that the return is not guaranteed. Different investments have different risk and return profiles, so it’s important to choose one that’s right for you. If you’re not comfortable seeing your investment balance move up and down, you could consider choosing an investment with a more stable, but potentially lower return.
5 investment options that could help you reach your goals
1. Savings accounts
One of the ways you can help your kids get set up is by opening a savings account for them. Savings accounts are easily accessible and low risk, but have a low potential return. If you have a short term goal, such as saving for a school trip in a term’s time, a savings account could be suitable as it is a low risk asset class.
In terms of tax, interest earned by savings accounts is considered to be “assessable income”, and if the bank account is for your child then it’s important to consider the special tax rules that apply to under 18s. For more information about tax and the higher rates that may apply check out the ATO’s website.
2. Managed funds
Another investment option is managed funds. These come in a range of different shapes and sizes, there are:
- Listed funds called “Exchange Traded Funds”
- Listed Investment Companies
- Passive investment funds and
- Actively managed funds.
You can find more information about the different types of managed funds on ASIC’s MoneySmart website.
When you put money into a managed fund, it’s pooled together with other people’s money and is used to buy assets like shares. There are generally minimal restrictions to buy and sell units in listed managed funds, however some managed funds have large minimum investment amounts, which could make it suited to goals that require a larger amount of money.
Investing in a managed fund can be a good way to diversify your investments, as your money can be invested across a range of asset classes, spreading your risk. There are managed funds with different levels of risk, so it’s important to do your research and choose funds that suit your goals and attitude towards risk.
Just like a bank account, income earned from managed funds is considered to be assessable income, and you may need to get a TFN for your child if they’re earning income from the account. For more information check out the ATO’s website.
3. Insurance bonds
Insurance or investment bonds are similar to managed funds in terms of diversification and risk options, but have some differences when it comes to tax. Families that have long-term goals and marginal tax rates above 30%, may find insurance bonds to be a tax effective investment option.
Insurance bonds have special rules around when you can make contributions and withdrawals, that impact the tax treatment of the investment. They’re designed to be held for 10 or more years, and if you make no withdrawals during this period, any earnings will be tax free. For more information see the MoneySmart website.
4. Shares
An alternative to investing through a managed fund or insurance bond is investing in shares. When you buy shares you’re buying a small part of a company, so if the value of the company increases over time, you could have a capital gain. Deciding which shares to buy can be a tricky process that requires much research and analysis, but could have a high potential return. It’s important to consider your investment timeframe and risk tolerance before investing in shares, as they are a high risk asset class.
Your child may need to apply for a TFN and complete a tax return if they’re earning more than $416 p.a. For more information check out the ATO’s website.
5. Super funds
A super fund is a tax effective type of long-term investment. Like a bank account, you can transfer money into a super fund, however the money will remain secure in the fund until you meet a condition of release, such as retirement. This means money in super funds can grow and compound for many years without being touched.
The money you put in a super fund is pooled together with other member’s money and is invested professionally by investment managers.
The money is generally invested across a diversified range of asset classes.
At Student Super, we offer three diversified investment options for members; Balanced, Growth and High Growth.
Super funds receive special tax treatment which can make them attractive for investors. If you transfer money into a super fund for a child, the returns earned on this money will not be included in your tax return or the child’s. The returns are generally taxed at 15% within the fund, instead of your marginal tax rate. Low income earners can also get special tax benefits to their super - check out our page on government incentives for more information.
We hope this article has given you some ideas on how to help your kids get set up for a more secure financial future. If you think a super fund might be right for your kids, you should check out Student Super’s Golden Goose Gifting feature.
