By Zac Masters | January 16, 2020
There are many different ways in which you can save for your child’s future with varying levels of risk and implications. The big thing to think about is that because it is likely to be a long term investment it should be invested for growth. Here are a few different options that can work and help your child fund future expenses such as paying that first deposit for a house, any education costs or even help towards their first car.
A big benefit of investment bonds is that when held for over ten years they are not subject to any capital gains tax. Considering that an investment for your child’s future is more than likely going to be a long-term investment strategy (ideally 10 years plus as if no withdrawals are made in the first 10 years any earnings on the bond will be tax free), this can be a great benefit.
There are things that need to be considered when looking at starting an investment bond as a way to save for your children. The first is making sure that you’re in it for the long term because there are fees associated with investment bonds so you want to make sure that you’re going to stick it out to get those tax savings. There are also rules associated with them, like the 125% rule which means that you can only put in 125% of what you contributed the previous year. If you break this the ten year period starts again.
You will also need to look for the providers that are out there and the investment options and pick the one that is most appropriate for you. Making sure that the investment aligns with your risk profile and the overall goals and aims you have for the investment. The investment bond is merely a structure to hold an investment in. Most providers have a wide range of managed investments to choose from so it is important to choose the right one that suits you.
This is quite a common one that parents use when trying to save for kids. The issue with this is that there can be tax implications for the parents and sometimes the portfolio might not have the diversification that a good portfolio should have. When looking to build a portfolio of shares you want at least 10 different shares to achieve some diversification within the portfolio, with the type of funds that you might be looking to invest for your children this could mean a small amount in each share and that means that brokerage can become a decent chunk of the investment amount in each share.
Exchange traded funds (ETF’s) are another popular option that can allow you to trade on the stock market and buy a particular ETF which will be able to provide you with more diversification than buying an individual company.
This is another popular way that people may invest for children. In a managed fund your money is pooled together with other investors, a manager then buys and sells shares or other assets on your behalf. These can be a good way to get diversification that you mightn’t be able to get with direct shares if you’re starting out with a lower level of funds.
It’s important to note that most of these managed funds charge fee’s so make sure that you’re getting value.
This can be an easy way to do an investment for children and is something that quite a lot of banks offer and it can be easy to set up. It is important to shop around though and make sure you are getting the best rate and even if you do have the best rate you may feel like this is quite low because of the interest rate environment that we are in. That’s why if you’re someone who has the tolerance for some level of risk when it comes to investing, other options could ultimately mean a better end result.
As with any investment that you are about to start, it’s not so much about what you start with but what you are able to contribute to it ongoing to enhance the compounding effects. You can start small and still achieve big outcomes.
As always, if you have any questions please feel free to email me at zac@pekada.com.au
Zac is a qualified financial planner at Pekada and host of the Wealth Collective Podcast. Living in Melbourne, Zac has six years of experience in advice and specialises in wealth accumulation and protection strategies. He loves to keep his finger on the pulse for the best strategies for wealth accumulators looking to build and protect their wealth tax effectively. Zac has been featured as an expert in Money Magazine.