How this former Socceroo invests for his kids

“While I don’t have a definitive outcome for how the money will be spent, it will probably go towards a deposit for a house or some educational benefit such as studying at an overseas university.”

How much to invest and where to invest for your children or grandchildren can be complex decisions. The Australian Financial Review spoke to three investment experts to look at different options.

ETFs: These are a type of investment fund that tracks an underlying index. It can contain investments such as stocks and bonds.

”ETFs provide access to a wide range of investments such as Australian shares, international shares, bonds and metals. ETFs are a basket of securities that track a specific market index. A market index is a section of the stock market, like Australian blue-chip shares or Australian mining shares,” says Chris Brycki, founder and CEO of Stockspot.

With a wide range of ETFs on the ASX, investors need to align their financial goals with the right portfolio. You can invest in an Australian ETF (easier to track) or an international ETF or a combination of both. Investors also need to decide whether they want broad market exposure or specific industry or investment themes.

“Investing in a diversified ETF portfolio such as a combination of Australian shares, international shares, emerging market shares, bonds and gold has the potential to earn you higher long-term returns from both income and capital growth. Further, they are generally low-cost and are a very tax-efficient method for long-term investing,” says Brycki.

He says $2000 invested in a broad mix of ETFs earning 7 per cent per annum and a regular top up of $100 a month could give your child about $39,350 by the time they are 21. This is in “future” dollars (based on 2.5 per cent inflation, the middle of the RBA’s target band).

“It’s for these reasons that we recommend investing for kids using a diversified portfolio of ETFs,” he says.

Investment bonds: These have a unique tax-paid structure and diverse range of investment options, says Grant Hackett, chief executive officer at Generation Life.

“They are tax-paid investments, meaning that when earnings are received, the investment bond provider has [already] paid a maximum tax rate of 30 per cent,” he adds. “They are most tax-effective if held for at least 10 years, with no personal tax payable on post-10-year withdrawals.”

Returns will depend on the investment performance of the underlying assets in the investment options you choose.

Superannuation: While the big downside to investing for kids via super is limited access, it’s worth taking advantage of the government’s co-contribution scheme.

“If the child is working, regardless of age, and income from employment is at least 10 per cent of their total income, superannuation is worth a look to take advantage of this,” says Suzanne Haddan, managing director, BFG Financial Services.

“Importantly, the contribution must be made by the child so consider giving the first $1000 of any gift to the child to contribute because under the co-contribution rules they may then receive up to $500 extra into their superannuation account from the government.”

There are other benefits to this contribution scheme. “Besides the chance of gaining a 50 per cent boost to your gift courtesy of the government, the $1000 deposited may be able to be withdrawn and used towards the purchase of a first home under the First Home Super Saver Scheme,” Haddan adds. “Limits apply and to withdraw the child must be 18 or over and satisfy all other requirements for the scheme.”

From the grandparent or parent’s perspective a tax deduction for the superannuation contribution cannot be claimed and if receiving income support, such as the age pension, pensioners will also need to consider the gifting rules.

“Giving more than $10,000 in total in a financial year or $30,000 over five years will mean the money is still deemed to be yours for the purposes of determining your pension entitlements,” she adds.