I have read your column for some years now and was wondering if you could offer me some advice regarding children's savings accounts. We have a one and a half year old daughter and she has been given small amounts of money since she was born.
She now has about $600 and we plan to add to this every year as well as putting in monetary gifts etc from grandparents. What kind of account would you recommend opening for her?
We would like her to have access to this money either when she is 18 or 21.
We have already purchased for her $100 worth of premium bonds. Would it worth buying more of these or would an interest based account be more prudent?
Thanking you in advance for your help.
It is a really great idea to be starting young, investing for future education expenses or just a nest egg to assist with the big OE, leaving home or other expenses young folk face today.
The amount you have accumulated is just enough (normally $500.00) to start a longer term strategy of investment. And, of course it is desirable to be able to add to the sum as further funds come to hand, normally additional amounts of $100.00 are accepted.
When investing on behalf of a minor there are a few issues to consider among them, ownership and taxation. It is fine to invest in your children’s name however you will need to sign the documents on their behalf and there are some rules to follow because the owner of the investment is a minor:
- The ‘owner’ of the investment is the person whose name and personal details appear on the application and the ‘authorised signatory’ is the person who signed the application on behalf of the minor (owner).
- Any future transactions to be carried out in respect of the investment (eg. withdrawals, transfers, switches, additions etc.) require written authorisation on behalf of the owner. It is not permitted to act on instructions from a parent or guardian who is not the authorised signatory. In future the owner has the right to authorise any transaction in respect of the investment without the consent of the authorised signatory.
- In respect of any investment, the authorised signatory should appoint a trustee in their Will so in the event of the death of the authorised signatory, the trustee of their estate assumes the role – not the legal guardian of the minor.
- Under the Financial Transactions Reporting Act 1996 verification of identity is required via a copy of birth certificate and tax number.
I assume by ‘premium bond’ you mean Equitiable’s 1st Mortgage premium bond? You do not suggest the term you have selected (1 to 5 years are the options) however they are secured by 1st Mortgage (therefore reasonably safe), and while fee free are at the lower end of the return spectrum and taxed ineffectively for a minor being ‘tax paid’ at 33%.
The investment options are extremely varied and the correct option for you will depend upon factors such as; your understanding, the return outcome wished for and the level of ongoing management. The overriding considerations are making sure that any fees are not excessive, the investment company is well known, will be around in 20 years time and the taxation treatment is suitable for a young person.
No term deposit or fixed interest investments currently available (in NZ) have a 20 year term so if you desire compounding and rolling over say a long, 60 month term deposit will be needed. If you wish for something a bit more related to market performance (like shares or property), can cope with irregular additions and is available to just roll on and on there are many options, but consider the comments above before signing on the dotted line, stay away from anything like ‘superannuation’, ‘life insurance’ or ‘education fund’ products, tax and fees almost defeat their returns.
Original Article published October 2005
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