I want to invest for 5 grandchildren, who are all under 7 currently. I want a 'low' cost option that will give consistent returns over the long run. I anticipate funds could be available for their education, maybe to buy a car or to help them in some other milestone event, perhaps even travel.
From GS in Melbourne
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I love this question posed by a grandparent about investing for their five grandchildren who are all under the age of seven. Investing for children is something that I advocate. Sadly, I feel too many people only consider investing for their children (or grandchildren) once they are much older. I believe it is important to get a good start financially and having a grandparent willing to make an investment for their grandchildren is really special.
There are many advantages to doing this, which I'll go into shortly, but before I do that, I just want to say that I truly believe as an advisor that learning about investing begins at home. Unfortunately our schools don't teach investing and how to invest. The only knowledge we seem to get is from our parents or our grandparents and of course our friends. Even university courses lack the depth and detail required to really learn about finances and investing. While we trust those people and institutions, unless they are a professional such as a Financial Planner they might not have the full tool set to provide proper advice.
Back to our generous grandparents; I believe the best product in Australia for them to help the grandkids is to use an investment bond. An investment bond is a product issued by a life insurance company with the underlying investment typically a basket of managed funds. You are able to pick a strategy such as Growth or Balanced and the real kicker is that after 10 years of ownership the income and capital gains are tax free!
However, there are some very important rules around investment bonds, one of which is the 125% rule, meaning you can only put in a maximum of 125% of the previous year's contribution. So, in simple terms, if the grandparents started that investment account with $1,000, the maximum they could put in the next year would be $1,125.What the grandparents would do is set up an investment bond for each grandchild and then contribute to that investment bond on a regular basis, say monthly or lump sum one-off contributions. The parents and even the children (once they are working) could make contributions as well, just be mindful of that 125% rule.
Investment Bonds have some incredible advantages:
- They are tax paid while invested so there is no personal assessable income.
- As mentioned, withdrawals after the ten year tax period are free of personal income tax.
- Nominated beneficiaries can be paid quickly and directly upon the life insureds death.
- Because they are tax paid they can be held for children under 18 without any tax consequence.
One of the company's I use for investment bonds has a unique product feature that allows you borrow against the bond. This would allow the grandparents to become the bank of Nan and Pop. It also means that they don't have to draw down on the capital to pay for things like education or a holiday and could effectively provide a very low interest loan to the grandchild. Something to think about!
There are some other interesting ways to use Investment Bonds but for me this product is absolutely, without doubt, the best way in Australia to invest for grandchildren or children for that matter. As always be sure to seek professional advice on these matters before doing anything.
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