Opening an account as a gift for you grandchild so they can draw on the funds for a reason later in life.
There are a lot of reasons as to why you might want to set up an account for your grandchild now. You may want to help them out with university expenses, their deposit for their first home, or even pay for a portion of their wedding. Whatever the reason, remember that you're looking at a long term investment (around 18 to 21 years) so this may have an impact on your strategy.
If you're starting with a small amount and making ongoing contributions along the way, it might be hard to find the right investment type. A high interest savings account may be a good place to start, and when there are enough funds available in the account you could move onto bonds or another investment type that provides higher returns. Holding it in the name of the grandparent with the lowest tax bracket may also be helpful.
Insurance bonds may be a good idea for those who can afford larger sums. There is no tax to worry about, and no capital gains tax applies when you transfer the bonds from one name to another. It's also important to note that investments can affect the amount of Government benefits (such as the age pension) you receive, due to the income and asset eligibility tests.
High interest savings accounts
If you're thinking about applying for a savings account for your grandchild, remember to look beyond the honeymoon or the revert rate. Introductory rates only last for a couple months, so you'll need to consider if you have the time to be switching accounts. A term deposit could be another option, but tend to less flexible than savings accounts. You'll need to have a lump sum ready to invest, rather than gradually adding to the amount.
These types of accounts can be opened in your name at first, but then you'll need to hand over the control of your account to your grandchild when he or she turns 18 years of age. You can also open an account in your grandchild's name, but keep in mind that your grandchild will have full access to the account so it may be best to wait until they've learned how to manage their money.
A subgroup of high interest savings account includes online saving accounts. If you're comfortable with technology and understand Internet banking, then you may want to consider these types of account. Due to the lower overhead costs, the interest rates offered can be higher than what you'd normally get at a big bank. Your money is readily available if you need it in an emergency, thought your interest income should be included in your tac return. Term deposits lack flexibility and accessibility, but you'll be less tempted to access the funds.
Compare high interest savings accounts and use our calculator below to see how much interest you'll receive
How does tax and children's savings accounts work?
The grandparent that owns the account includes the interest in their tax return. When the account is held in the trust for the child by the grandparent, the interest earned in that account is included in the grandparent's income tax return. In the case of joint accounts, the interest earned on the accounts need to divided equally between all the account holders and included in their tax return.
What should I look for in a children's saving account?
Here are some of things you should pay attention to in your comparison:
- No ongoing fees.You'd want to get the most out of your account, so avoiding fees can help. Your amount could also be starting as a small amount.
- A competitive interest rate.The higher your interest rate, the more money you receive from the funds sitting in your account.
- Accessibility.If you intend to use the money in the account for expenditures, you'd want to make sure that it's easy to access the money without any fees.