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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Thanks so much for your question. Not one with an easy answer, because I would need to know a lot more about your situation before I can give you the best possible answer. You are clearly an experienced investor and yes, you were “lucky” in selling your investments.
Firstly investing, whether it is in property or in the stock market, is a long term decision. Both the property market as well as the stock market will have their short term ups and downs, but based on historic figures, returns are expected to exceed that of cash and term deposits over the longer term. Investing takes a lot of nerves and patience, especially in current times.
Returns have often been strongest right after the market bottoms. After the carnage of 2008, for example, U.S. stocks finished 2009 with a 23% gain. Missing a bounce back can cost you a lot, which is why it’s important to consider staying invested through even the most difficult periods, as it is always difficult (if not impossible) to time the bottom of the market.
Before giving your children a substantial investment in either property or shares I suggest you consider the tax consequences. Minors can pay a very high rate of tax, up to 66% on investment income or capital gains. You have not indicated whether they are in their early teens or late teens, which could be a factor in your decision-making process.
Before investing in your children’s name, consider whether these funds would be better held in another person’s name or tax structure. I suggest you discuss this with your accountant before making any final decisions. You can have a very good investment, but if you have to pay the tax man almost half of the investment income or gains, is it really suitable?
Investing within superannuation is a tax-effective way of investing. Super Funds only pay a maximum of 15% tax on earnings and capital gains. You did not disclose what your personal marginal tax rate is, but I assume this would be higher than the Super tax rate. The difference in tax treatment can also be seen as a “guaranteed” return. For example, if you had $100 income from investments invested in your own name and it is taxed at the highest marginal rate plus Medicare Levy you would end up with $53 after tax. This $100 investment income in Super is taxed at 15%, leaving $85 after tax. The difference represents a guaranteed 32% after tax “return” on the original $100 income.
The concessional tax treatment in Super also means that there are limitations in how much you can contribute and when you can access the funds. You can access the funds tax free at the age of 65. Without knowing your age and circumstances I cannot establish whether this strategy would be an option for you in your decision to invest for your children. It is certainly worthwhile for you to obtain good financial advice.
Once you know in what entity or name the investments are to be held, you can then look at either investing in shares or in property. Both shares and property investments are not short-term investments. Although there will always be a small minority of speculators who make money by buying and selling in the short term, most investors know they need to be invested for the long haul to reap the rewards of capital growth and/or compound interest. In the long term, it’s not about timing the market, but the time in the market!
Choosing between property and shares will also depend on many more factors like for example your personal preferences, the amount of money available for investment, do you need to borrow money, does it need to be a liquid investment etc. Again, a financial adviser can talk you through all the pros and cons, tailored specifically to your situation.
Whatever strategy you will ultimately decide on, stick with it for the long term and it will bear fruit. Good luck!
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