I got lucky and sold all my investments at the top of the market in late 2019. Now I am sitting on cash and wondering what to do with it. I have 15 years until retirement and would be prepared to non-concessionally contribute to topping up my super although I have a very healthy balance already. I would also like to gift a substantial amount of the balance to my two teenage children. I was considering encouraging them to invest through one of the robo-digital investing tools available online to take advantage of these depressed share prices, and also so they could build a nest egg to purchase an apartment in the next 10 years. However, I am also weighing up whether it would be better to purchase an investment property now given the likely impact on property values from COVID-19. What is your advice on gifting in general, and these proposed alternatives for the funds?
Nic in Surry Hills, NSW
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That is certainly fortunate timing to have sold your investments. Now the question is when and how to best add the funds back into the investment markets. Before we talk through your investment options, I’d like to address your gifting question first.
Gifting funds to children to provide a financial head-start can be a rewarding and fulfilling option. It is also an opportunity to help your children learn some key life lessons. I like that you want them to invest the funds over a reasonable period of time. This will teach them the magic of compound returns, provide an early introduction to investment markets whilst also helping them to establish a strong financial base.
One added step that you could consider is to gift the children a lower initial amount i.e. $10,000 but offer to equally match any further contributions that they make from their own savings. For example, if they can save another $5,000 of their own money and they voluntarily add it to the investment then you could offer to match this with a further $5,000 gift. This gives your children motivation to work hard and forms the right habits around saving money. It also places the onus back onto your children to earn the right to receive this wonderful opportunity that you are offering them.
Investment property & COVID-19
There is no question that COVID-19 has brought significant pressure onto the investment property market. Property prices have been at elevated levels for quite some time and there could be a perfect storm brewing, particularly in the unit / apartment market. Higher property vacancies could flow through to reduced rent, further tightening in bank lending policies combined with increased tenant rights may reduce investor demand – at a time when property owners may be forced to sell due to job losses.
Thus far, property prices have held up remarkably well. However, this is the result of the substantial emergency support provided by the banks & government. These support measures expire around September, those planning to purchase a property could consider waiting a few more months to see if lower prices emerge in late 2020.
Selecting your investment ‘structure’
Investors often take great care in choosing the right investment. Equally important is to choose the right investment structure (investing in own name, partner’s name, family trust, superannuation).
Superannuation is often considered one of the most beneficial structures within which to accumulate wealth. The maximum tax rate on investment returns inside super is 15%. In comparison, those earning over $180,000 pay tax at 47% on investment returns.
Let’s say you have $300,000 to invest. You expect to receive 8% annual returns or $24,000 pa. For simplicity, we assume the investment return is fully taxed. The table shown illustrates the after-tax returns you would receive.The important thing to note from the table is that there was no more ‘risk’ taken to achieve 6.80% return inside super than 4.24% outside super. It is just a different investment structure - albeit there are limitations on accessing your super before age 65.
If you have substantial funds left-over after contributing to super and gifting funds to your children, then a family trust could be considered. Family trusts have good asset protection benefits and if your children are over 18 and not yet earning an income (i.e. studying at Uni) then you may have opportunities to ‘income split’ the investment returns. I won’t go through the detail of family trusts here but suffice to say you should obtain advice as to whether it is beneficial.
The most important thing you can do is seek qualified advice – an adviser will help you make the right decision after taking into consideration your goals, objectives and personal circumstances.
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