I have 3 pre-teen children and would like to start an investment portfolio for them. How much do I need, and what would be the best way to do this?
Simon, in Richmond, Vic
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Thank you for your enquiry and for such an excellent question.
Investing for children will not only give them a head start for their financial future but equally deliver some valuable lessons about money. There are some considerations that can help you find the right kind of investment and set them on a solid path.
As interest rates head towards historical lows, bank deposit returns are drying up, it is worth exploring other opportunities in the investment universe. Here are the considerations.
The first thing to consider is why you want to invest. There is plenty of products you could select, so think about which goals you’re aiming to achieve, the product is simply the tool.
Setting something up to fund university expenses or a gap year might be quite different from an investment to establish a deposit on a first home, where the aim is a lump sum.
Alternatively, you may simply to want to open a bank account to give them the feeling of ownership, the equivalent of the old over-the-counter passbook. This might be a first step towards financial literacy in adulthood.
It’s important to consider the right vehicle. Tax, social security and the appropriate structure will all affect your decision. Once you’re clear about your goals and aims, it pays to bear in mind the effects of taxation.
In Australia, children under 18 on the last day of the financial year (30 June) are considered minors as far as tax is concerned. Minors are generally taxed at penalty rates on unearned income such as interest, rent and dividends. Be sure to speak to your accountant or financial (tax) adviser.
Below are some of the popular options parents turn to. Some may have minimum opening amount whilst others don’t.
Opening a bank account is usually the most straightforward. This doesn’t require the child to sign a legal document and so can be registered with your child’s name. However, if they are under 16, the bank will often require parental permission.
Managed funds and share investments generally require legal capacity, which doesn’t apply to under-18s. Therefore, these are usually registered in an adult’s name.
An insurance bond is a type of life insurance policy, with a range of investment options. It may be withdrawn in part or full at any time, although there may be tax implications. It can be established in the child’s name for those aged 10 to 16 with parental consent. Anyone over 16 can invest without consent. Some of the providers may have a minimum investment of $1000.
For children under 16, insurance bonds generally also offer a ‘child advancement option’, where a parent or grandparent invests on behalf of the child, with ownership passing at a nominated ‘vesting’ age. This might tie in with making funds available for education, home deposit or travel and so on.
Although it may seem odd for an under-18 more into screens and skateboards, it’s never too early to think about super.
Children can become members of a super fund, if the rules of the fund allow this. Generally, a parent or guardian needs to sign the application form and there are additional considerations if the child will be a member of a self-managed super fund (SMSF).
Because of its concessional tax treatment, super is a popular savings vehicle. However, depending on your purpose for setting up the investment, it may not be right for your child as they may not be able to access their funds until their own grandchildren have skateboards.
I hope this has been useful and set you in the right direction.
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