Anthony Keane* says that while the traditional method of saving money for kids is drying up as cash returns shift into reverse, parents still have plenty of other investment options.
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Investing for children is becoming easier and can deliver kids a double benefit — a headstart for their financial future and some valuable lessons about money.
While traditional savings accounts have been hit by interest rates tumbling towards zero, other options are expanding.
Direct share ownership, exchange-traded funds and investment bonds are three of the most common alternative ways parents and grandparents put money away for children.
Single shares can be bought quickly and cheaply using online stockbrokers, but the minimum investment size of $500 and risk caused by lack of diversification are potential problems.
Exchange-traded funds, or ETFs, have boomed in the past decade and spread each dollar among every member of a sharemarket index such as the ASX 200.
Investment bonds are the old-guard, tax-paid investments that must be owned for 10 years to get the full benefit.
They have critics and supporters and have broadened their products in recent times.
Robo adviser Stockspot, which creates ETF portfolios for clients, has had a 150 per cent rise in its fee-free accounts for children since interest rates started dropping mid-year.
Stockspot CEO, Chris Brycki said the best strategy for parents was to start as early as possible, “even if it’s just a small amount”.
“Teaching kids that they can be a part owner in a business is one great lesson — the other is the value of compounding,” he said.
As children get older, parents can explain the portfolio and how much money it’s earned through the compounding of reinvested income over many years.
“You can set them up for success in the future,” Mr Brycki said.
He said investment bonds were previously popular for their tax benefits, but their lower investment returns and higher fees had offset tax gains.
However, Planning for Prosperity Financial Adviser Daniel Budreika said today’s investment bonds offered higher returns through low-cost index funds.
“After 10 years, the proceeds become tax-free, and the bond’s earnings don’t form part of the parents’ income,” he said.
An investment bond can be transferred to a child when they reach a nominated age without triggering capital gains tax.
Mr Budreika said parents could be tempted to raid children’s cash deposits for their own use, and investment bonds made it harder to access.
Another question facing parents is whether or not to tell the kids about their investment.
“There’s no one size fits all approach with the product, the strategy or the question of should you tell them,” Mr Budreika said.
“You don’t want them yanking it out at 18 and spending it all on a car.”
* Anthony Keane is Personal Finance Editor at News Corp Australia. He tweets at @keanemoney.
This article first appeared at www.news.com.au.
