We’ve all heard the stories of parents buying their newborn a property or putting money into shares. But setting up your kids’ future is something that most parents will think about almost from the time they arrive. So what is the best way to invest for your children – bonds, term deposits, shares, property or super?
Perhaps surprisingly, one of the more important things to look out for isn’t the capital gain, though this is a consideration. You also need to factor in how the investment affects your tax and any Centrelink benefits. This means seeking targeted financial advice before choosing the investment so your situation and goals are firmly accounted for.
High-interest savings accounts
If you have a small amount to invest, a high-interest bank account could be the way to go. Not only are they relatively simple to set up and administer, they give parents the opportunity to show children the power of investing. These basic savings accounts, however, need to be kept to low amounts in order to be effective.
According to the Australian Tax Office, special rules apply to children under 18, with tax-free thresholds applying to interest earned on the accounts. There are clear rules, however, about the use of the funds in the account, meaning that the funds must relate to the child and not just be in their name. See the ATO website for more information.
Sometimes called insurance bonds, investment bonds are a good option for larger amounts of money. A lot like superannuation, the fund that holds the investment pays tax at a rate of 30 per cent meaning you don’t need to include any earnings in your taxable income. While you can withdraw your investment at any time, if you leave your bond for at least 10 years and have not put in more than 125 per cent of the previous year’s contribution, you can withdraw all or a portion of the funds tax-free (certain penalties exist for an early exit).
According to the federal government’s MoneySmart site, “most investment bonds also offer a child advancement policy where ownership of the policy is able to be transferred to a child when they reach a nominated age. This can be a tax-effective way to save for a child's future.”
Putting some money in shares can also be a profitable option for long-term investments. Unlike investment bonds, you have complete control over where your money is invested and in what companies. You also avoid any fees or charges associated with managing the shares. Like simple bank accounts, you can help improve your child’s financial literacy by including them in the process.
It’s important to diversify your shares, however, to spread the risk. Moreover, it’s important to get financial advice on how any capital gains or dividends can affect your taxable income.
Buying property for your child can be a minefield that involves high risks and significant costs to transfer it into their name later on. Unlike spreading risk by diversifying your share portfolio, you are potentially putting a large amount of money in a single investment with significant risks for losses. There are, however, simpler ways of investing in property, such as investing in a managed property fund.
Investing in your children’s future is a wonderful idea, and by starting early you’re not only taking advantage of enforced savings, you can also use it to increase your child’s financial literacy. However, the most important thing is to approach the investment with as much information as possible and to ensure you get trustworthy and tailored advice.