How to Invest for your Children’s Future
Investing for children or grandchildren is a wonderful way to help set loved ones up for the future, whether it be funding education expenses, purchasing a car or contributing towards a first house deposit. It also enables you impart positive financial habits from a young age and share in the joy of the gift with the beneficiary. The problem many families run into is how to do so in a tax-effective way. Investing in your name means extra tax obligations, while investment income received by children under 18 is taxed at the top marginal tax rate.
Investment Bonds
Investment bonds are used by families to save for children as they are tax-paid investments. This means the bond provider will pay tax on your behalf and the income, including capital gains and dividends, will not be assessed in your tax return. The issuers pay the company tax rate of 30 per cent, however, the use of franking credits and other offsets means the real marginal tax rate can be closer to 15 per cent. For professionals with income above $135,000 (post stage 3 tax cut amendments), this makes investment bonds a compelling consideration. The bonds also have the benefit of a 10-year capital gains free withdrawal, meaning an excellent way to gift and grow assets without creating additional tax burdens for the holder.
Education Costs
The cost of schooling is the biggest annual expense for families, with an estimated $316,000 spent on sending children to a private school and $92,000 to a public school. The same survey found that 81 per cent of parents feel overwhelmed by their financial situation and 85 per cent said paying for school was weighing on household finances. Concerningly, a quarter of household's fund education through debt. Instead, parents who plan early can adopt an investment bond to pay for some or all the fees. A smaller initial investment and regular contributions can be made to ease the ‘fee shock’ that comes with school fees.
Giving with Warm Hands
Australians are enjoying longer lives, so inheritances received by adult children usually arrive too late to help with financial milestones such as purchasing a home or starting a family. We also know that younger generations are less inclined to save and give less consideration to the future. Subsequently this has given rise to early inheritances, with retirees aiming to foster fiscal responsibility while also sharing in the joy of the gift.
Investing for children is about more than setting money aside. It’s about planting seeds for their future, helping them reach big milestones and easing life’s financial hurdles. Done well, it’s a gift of opportunity and values that can last a lifetime.