As a parent you want the best for your kids. This might involve saving and investing money for their future, in addition to making sure they eat their veggies, do their homework, and brush their teeth.
While I can’t help with getting your child to eat broccoli, I can tell you about investing for kids. In this article I’ll cover the why and how for investing for kids in New Zealand, and a the pitfalls to watch out for – it is not always the same as investing for adults.
Update (30 December 2019) – Interest rate changes
– Co-operative Bank Youth Accounts: 4.00% > 3.00%
Why should you invest for your kids?
Kids are pretty fortunate these days with heaps of support from the government, such as interest free student loans, and KiwiSaver HomeStart grants. But these don’t pay for everything, nor are these benefits guaranteed to be offered by future governments. Investing is all about growing money for the future, and investing for your child can better prepare them to tackle future financial commitments like expenses while studying, going on an exchange or OE, or putting together a house deposit.
Kids usually have several years before they face any significant financial commitments. Take a 5 year old for example – you probably won’t be thinking about their retirement at such a young age, but still they have 13 years until they finish school, or maybe 20-30 years before they consider buying their first home.
Investing requires time to grow your money, and kids have this time on their side. They can ride out any volatility you get from investing in riskier (but potentially higher return) asset classes, and they have time to take advantage of compounding returns year after year. The earlier in life they start investing, the better.
Tax, the government’s share of our investment returns can be up to 33% for those in the highest income bracket. Given kids usually don’t earn any significant income, they’ll probably be taxed at a much lower rate of 10.5%. Paying up to $22.50 less tax on every $100 they earn is a huge advantage, especially when you can reinvest this to compound your returns.
This advantage alone should be enough reason to invest for your child, rather than combining their investments with your own account. They just need to have their own IRD number. However, it is not a good idea to invest your own money in your child’s account to lower your own tax bill, as this could be seen as tax evasion.
Unfortunately financial education is pretty limited in schools, so it is up to parents to teach their kids about how money works and how to use it responsibly. Giving them ownership of money through their own accounts should hopefully make them more engaged and interested in learning. The more they know now, the less likely they are to fall into crippling debt and the hands of payday loan sharks in the future.
What makes a good investment for kids?
Kid friendly – An obvious requirement is that the investment service you use accepts under 18s, and allows you to hold the investment in your child’s name. Not all services (e.g. Hatch) allow accounts for under 18s.
Low contributions – Most kids don’t have their own significant source of income, so rely on contributions or gifts from generous family members to invest. A good investment service needs to support this, by allowing you to make small contributions.
Low fees – Low fees are important for adults as well, but are especially crucial for kids, given they are likely to have smaller balances (which means fewer dollars to offset any account fees).
Control – Only a few super talented kids have the knowledge and maturity to make sound decisions on their investments, so a good investment service should allow their parents to control the account, while allowing you to transfer control to the child once they are old enough.
1. Bank accounts for kids
Bank accounts are easy to understand for kids, keeps their money accessible, and earns them a little bit of interest. While the interest won’t make them rich, they’re still ideal as a short-term place to keep their money. For example, saving for a toy, gadget, or building up savings to make a larger investment elsewhere.
Co-operative Bank’s Youth Accounts have an outstanding feature in that they pay 3% interest on balances up to $4,000! This is far higher than any other bank’s term deposit or savings interest rate, and definitely provides encouragement to save. In addition, their Youth Accounts are fee free, and they allow you to add EFTPOS and internet banking access when your child is ready for them.
All other banks have kid friendly accounts, and they’re all pretty similar, being free of account and transaction fees. Some even chuck in some extras to help kids save and learn about money such as:
- ASB – Clever Kash – a digital money box which shows your child’s account balance and progress towards a savings goal
- Westpac – Fun pack – under 12s will get a ‘Fun pack’ containing a Westpac Rescue Helicopter money box, and a fun activity book
It might be convenient to have your child’s account at the same bank as you, but unfortunately no other bank manages to come close to Co-op Bank’s 4% interest rate (most offer 1-2%).
Access and control of accounts
Different banks have different rules about who can access and control a kids’ account (e.g. to make withdrawals), and this usually depends on the child’s age. The three levels of control are generally:
- Only parents have control over the bank account (typically for young children)
- Parents have control over the bank account, but can choose to give their child access (typically for pre-teens and younger teenagers)
- The child has full control over their bank account (typically for older teenagers)
Banks also have rules around giving a child access to an EFTPOS card, internet banking, and a Debit Card (depending on the child’s age and parent’s permission). Discuss with your preferred bank to ensure their access rules meet you and your child’s needs.
How about term deposits?
Term deposits used to be a solid, low risk way for locking up funds for the future. Unfortunately the returns are just too low these days, with most rates sitting below the 3% mark – this simply won’t be adequate to keep up with rising living, education, and housing costs. They don’t allow for regular contributions either.
2. Long term investing for kids
Equity funds (funds that are invested in shares) are probably the best long-term investments for kids. Given the long investment timeframe when investing for kids, your child has enough time to ride out any volatility in the sharemarkets and take advantage of investing in one of the world’s best performing asset classes. For example, an investment in the NZX50 ten years ago, would be worth more than triple today!
In addition, funds give you a well-diversified investment, are easy to access and manage, and require low contribution amounts. All it takes is a $50 per month investment to reach a portfolio size of $19,000 when your child turns 18 (assuming an average return of 6%).
Best fund platforms/providers
InvestNow is a Fund Platform with minimum investments staring from $50, but most importantly, they don’t charge any account fees. InvestNow allows you to attach child accounts to your own account, so you can have full control over it, but can unlink the child account once your child is ready to be responsible for their own investments.
One thing to watch out for on InvestNow is the Smartshares ETFs – these are listed PIEs, which are taxed at a fixed rate of 28% (but you may be able to claim the excess back through a tax return). If you prefer to simplify your child’s tax affairs then there are plenty other options on InvestNow – they have over 100 funds. It’s beneficial to invest in a multi-rate PIE as these are taxed at your child’s PIR (most likely 10.5%), and most funds on InvestNow are multi-rate PIEs – go to this link which filters out any funds that aren’t multi-rate PIEs.
Which fund? These are the lowest fee, multi-rate PIE equity funds on InvestNow:
– AMP Capital All Country Global Shares Index Fund
– AMP Capital NZ Shares Index Fund
– AMP Capital Australasian Property Index Fund
The other type of fund that InvestNow offers are Australian Unit Trusts, such as the low fee Vanguard International Share Index Funds. These are considered overseas investments, so you need to be aware of the tax implications – a tax return is required if your child earns over $200 in dividends or interest from overseas, or holds over $50,000 in overseas investments.
SuperLife’s myFutureFund is a youth investment account where you can choose to invest into a selection of 44 funds. It is a way to get around the fixed 28% tax rate on Smartshares ETFs, given SuperLife’s funds largely mirror Smartshares’ ETFs, but are structured as multi-rate PIEs.
The minimum investment amount is $1, and they allow relatives and friends to make contributions into the account (good for receiving gifts). You can hand over control of the account to your child at a nominated age between 18 and 25. SuperLife’s downsides are the $1 per month account fee, and their fund management fees are higher than many of the funds you can find on InvestNow.
These services are all kid friendly but I don’t think are as good as InvestNow and SuperLife, as their pitfalls can outweigh their strengths.
Sharesies is an amazing fund platform because they probably have the best user interface, and they allow you to invest as little as one cent. Sharesies’ kids accounts must be linked to and controlled by an adult account, but they can be unlinked after your child turns 18. Under 18s get a 50% discount on their account fee, however this still compares unfavourably to InvestNow who don’t charge an account fee at all.
In addition, most funds on Sharesies are listed PIEs – Smartshares ETFs, where the tax rate for these are locked at 28%. Unlike InvestNow, there are few options on Sharesies when it comes to multi-rate PIEs (the AMP and Pathfinder funds being examples). Sharesies also offers investing in individual companies, which I’ll discuss below in section 4.
Keen to start building your investment portfolio with Sharesies? Sign up with this link, and you’ll get a bonus $5 in your account to invest!
Simplicity offers some excellent diversified investment funds (containing a mix of global and local shares and bonds all in one fund), at a low management fee of 0.31%. For example, their growth fund contains 78% shares, and 22% cash and bonds. Simplicity waives their $30 annual membership fee for under 18s, but their big downside is their minimum investment requirement of $5,000 – so it’s only suitable for kids who have a generous family member to kickstart their investment in these funds.
You can also invest in Smartshares ETFs directly from the issuer. I think it’s an inferior option though:
- The minimum initial investment is $500, with subsequent investments needing to be a $250 lump-sum, or at least $50 regularly per month. This is higher than other services.
- There is an initial entry fee of $30. And to exit the funds, you need to sell them via a broker, which will incur more fees and/or admin effort.
- You are investing into Listed PIEs which means a 28% tax rate applies, or even more admin effort if you want to claim the excess tax back.
- The processing times are slow, with contributions only being processed once per month.
You are probably better off going for any of the other options mentioned above. Check out The Happy Saver’s blog post to hear about her experience in investing in Smartshares for her daughter.
3. KiwiSaver for kids?
KiwiSaver is the New Zealand’s best saving scheme, allowing us to combine our money with employer and government contributions in order to invest it for retirement or buying a first home. But many people are gonna disagree with me on this one – my opinion is that it’s not a good idea for under 18s to be in KiwiSaver. Why?
No benefits – The core benefits of KiwiSaver like Employer Contributions and Government Contributions don’t apply to under 18s – no 3% contribution match from their part-time job, and no annual $521 government contribution. The only benefit of KiwiSaver for under 18s was when the government used to give you a $1,000 kickstart for opening a KiwiSaver account. This incentive was discontinued in May 2015.
No flexibility – Any money that goes into your child’s KiwiSaver stays in it until they buy their first home. And there is no guarantee that your child would want to become a homeowner when they’ve grown up – in which case the money would be locked in until they’re 65! The money cannot be used to further their education, start their own business, travel the world, or to pursue any ventures they might desire.
KiwiSaver funds are just ordinary investment funds with restrictions
Instead consider investing for your child using a non-KiwiSaver fund through the services described in section 2 above. Non-KiwiSaver funds give you the flexibility to withdraw the investment at anytime – for education, sports, buying a car, or whatever. If you still insist in having KiwiSaver for your child, JUNO and Simplicity are great options – JUNO has zero fees for under 18s, and Simplicity waives their $30 annual account fee (but not their 0.31% management fee).
4. Other investment options
Shares in individual companies
Shares in individual companies are a great long-term investment option. Imagine your child growing up alongside a increasingly successful company, like Auckland Airport which has increased in price from around $1 in 2000 to over $9 today (plus getting all the dividends they paid out). Investing in shares of individual companies can be more tangible too – wouldn’t it be cool to tell your kid that they own part of the airport they’re visiting, or part of the plane they’re flying on?
The hard part is picking which companies to invest in – which companies are going to stick around and be successful over the next 10-20 years? For most people it’s way easier to just invest in funds, as they invest in many companies at once. But if you really want to invest in shares, then Sharesies is probably the way to go for kids. They have low brokerage fees, suitable for making small, regular investments.
Keen to start building your investment portfolio with Sharesies? Sign up with this link, and you’ll get a bonus $5 in your account to invest!
Bonus Bonds are like the McDonald’s of the investing world, bringing in an element of excitement – every Bonus Bond you buy gives you a chance to win prizes of up to $1 million every month. They have a low $20 minimum investment amount, and there are no ongoing account fees. With over 3 billion Bonus Bonds in existence, chances are your child already owns some, or has received them as gifts from relatives.
Unfortunately Bonus Bonds is a pretty terrible investment (could you even call it that?). The chances of winning prizes are pretty small (You are more likely to win 1st Division in Lotto than to win the $1 million prize in Bonus Bonds), and if you don’t win, you don’t earn anything.
– Bonus Bonds – Is it investing or gambling?
All the above investment options are aimed at growing your child’s money, but this is not the only way parents can set their kids up for a great future. You can invest directly in their education, sports, music, hobbies, or in family holidays to see the world together. Or maybe your child is an exceptional young rugby player requiring ongoing expenditure on expensive gear and sports trips. Perhaps sacrificing the opportunity to invest in shares or funds to pay for these things are worth it to support making their All Black/Black Fern dream come true.
Investing is one of the best things you can do to prepare for your child’s future. Kids have a long investment timeframe, allowing them to invest in risker (but higher returning) assets, pay less tax, and they can use their investments to learn about money. Whether the money is going to be used for education, travel, or a house, they are sure to be grateful to have an investment portfolio that’s grown together with them over the years.
The main things to know about investing for kids are:
- Get an IRD number for your child, so they aren’t stuck paying the same rate of tax as you.
- Co-operative Bank offers the best kids’ bank account with their 3% interest rate. Otherwise all other banks offer fee free kids’ accounts.
- Equity funds are the way to go, given their high growth and the long investment timeframe that kids have. InvestNow and SuperLife are great options to access these funds.
- Watch out for Listed PIEs (e.g. Smartshares). They’re taxed at 28%, no matter what your child’s tax rate is.
- KiwiSaver isn’t the best option for under 18s. Invest in non-KiwiSaver funds instead for more flexibility.
- Avoid Bonus Bonds. You probably won’t win enough to outperform the sharemarket.
- Investing to achieve financial returns isn’t everything.
Thank you to Vivian, Shawn, and Sara for helping me put this article together. May their kids be wealthy and successful when they grow up.
The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.