Giving your grandkids the ultimate Christmas gift: A financial head start in life

For grandad Kevin, ensuring his children and grandchildren have the best possible start to their adult lives involves “giving with a warm hand, not a cold one”.

The retired Melbourne businessman doesn’t want his offspring to wait until he passes away to benefit from the money he worked hard for during his long career in financial services.

“I’d rather have the joy of a conversation with them, being able to say that I love and care about you and want to make a difference to your life,” Kevin explains. “Why wait until the kids are 50 to get an inheritance, when at that point they don’t need the money anymore?”

Instead, the decorated former soldier and Member of the Order of Australia recipient opted to establish investment bonds from Generation Life, which allow him to put money aside for his kids and grandkids in a place it can grow, while he retains control of when the youngsters have access to the cash.

Kevin says he picked investment bonds over simply gifting the money in part because of the years it takes for the bonds to mature, which offer him the opportunity to have an ongoing conversation with his kids and grandkids about money matters.

“It’s a fine line between encouraging and supporting them, without burdening them with a lump sum and expecting a young person to make the smartest decision on what to do with it,” he says.

“It allows a continued conversation where I respect them and their autonomy, but it’s not open slather that says to them they don’t need to work for something because they’re going to get a sum of money.”

Kevin’s no doubt right to be cautious about the tricky financial decisions the next generations may face.

Increasing education expenses, a more global and thus uncertain employment market and rocketing capital-city house prices are just some of the forces that could make their adult lives financially precarious, especially if they don’t have the benefit of the sound financial education many Baby Boomers received from their own parents.

In today’s low interest rate environment using a cash account for long term savings may not be the best solution to meet your long term savings goals for providing a grandchild with a financial head start. Over the long term, a diversified portfolio of investments is expected to provide higher investment returns. There are a number of ways to achieve your long term investment goals including investing directly or using a managed fund. An alternative to this is to invest in an investment bond that provides the ability to construct a well diversified investment in a tax effective environment.

Investment bonds effectively pool investors’ money and invest it in a range of financial markets assets (from cash to bonds, shares and property) or investment funds. Investment bonds are most tax-effective if held for at least 10 years – but investors can access their funds at any time during their investment. (Removing funds before maturity, however, may create a tax liability.)

With investment bonds:

• The tax situation is simple. Tax is paid on returns every year out of the investment bond’s earnings, at a maximum rate of 30% rather than the investor’s personal marginal tax rate and these earnings don’t contribute to your personal marginal tax rate. There is no annual reporting required while you hold your investment, provided you don’t make a withdrawal within the first 10 years. After holding your investment for 10 years, earnings won’t attract any personal tax liability – this is known as the ’10 year advantage’.
• Returns are typically higher. Capital in investment bonds grows through investment returns, not via interest payments – although both bonds and cash accounts benefit from compounding interest. Generation Life’s bonds, for example, are based on underlying investments with some of the world’s best-known fund managers: Magellan, Perpetual, Blackrock and Vanguard.
• There are tax-free benefits. Investment bonds are an efficient and cost-effective way of providing for loves ones after you’re gone. Any benefits paid to the beneficiaries are tax-free, irrespective of how long you have held the investment bond.

“The beauty of investment bonds is that they’re so easy to use, you can set and forget,” Kevin says. “The investment choices are made for you because you’re investing in a properly managed fund. That way they work just as well for someone who has no real knowledge of stock markets as someone who does.”

Aside from investment bonds being a tax-effective and controllable investment, there are many additional advantages.

• Complete control over access. An investor can transfer the entire bond to their child or grandchild at a specific age or date, limit the amount the child can withdraw annually after the bond is transferred, or, in the case of Generation Life’s ChildBuilder bond, specify (in a non-binding manner) what expenses the funds can be used to cover. This however can be changed at any time if the intention changes or you wish to use the funds for something else.
• Simplicity for inheritance purposes. An investment bond transfer from investor to child can reduce the complexity of making bequests by bypassing the estate distribution process entirely. Generation Life’s LifeBuilder bond, for example, allows the investor to set their own death as the trigger for the bond’s automatic transfer.

Sydney grandmother Kate Reid used investment bonds to ease the process of honouring her late husband Peter’s “rather convoluted” will, in which he bequeathed money to each of their four grandchildren to cover the cost of a university education.

Like Kevin, Kate, who retired in 2015 after working as a marketer at the ABC for 50 years, says she values the combination of simplicity, asset growth and control that investment bonds offer.

“I’m not going to try to interfere so much in the grandchildren’s lives that I would dictate what they should study,” she says. “It’s more that I can release the money when I know it’ll benefit them and their education.”
Although investment bonds are often used by grandparents or parents to accumulate money to cover the cost of a child’s private schooling or university education, a first car or even a first home deposit, investors don’t need a substantial sum to invest to open an investment bond.
Generation Life’s LifeBuilder and ChildBuilder bonds can be started with just $1,000 and offer investors the option of continuing to contribute funds throughout the life of the bonds.

The money invested in a bond remains accessible to the investor throughout the life of the bond, which Melbourne grandad Kevin says was why he was so impressed with the product that he took out some investment bonds for himself.

“I didn’t need an income from the money at the moment so I could’ve invested it in superannuation but then it’s locked up and fairly inflexible, so I put it in investment bonds instead,” he explains. “Aussies always like to think about the what-ifs, so with the bonds, I can access the money if I really need it.”

Kate’s also opened a personal investment bond that she says contains the “fail safe” funds she keeps aside in case of an emergency.

“I’ve been very happy with the bonds,” she says.

Do you plan to give your grandchildren a financial head start in life? Have you considered an investment bond as a savings options for them?

¹ For a limited time, all new investment bonds established before 31 December 2018 won’t pay an administration fee on the first $50,000 of an investment’s balance until 31 December 2019 and may qualify for an administration fee discount for balances over $50,000. Please refer to the PDS for investor and investment eligibility criteria and further information about how the administration fee discount works.
Generation Life Limited AFSL 225408 ABN 68 092 843 902 is the issuer of investment bonds (including LifeBuilder, ChildBuilder and FuneralBond). In deciding to acquire or to hold an investment bond you should obtain the relevant Product Disclosure Statement (PDS) and consider its content. We recommend you obtain financial, legal and taxation advice before making an investment decision. The information in this advertisement does not take into account the objectives, financial situation or needs of any individual and is not intended as financial or investment advice or a recommendation. Generation Life Limited excludes, to the maximum extent permitted by law, any liability (including negligence) that might arise from this information or any reliance on it. Generation Life Limited does not make any guarantee or representation as to any particular level of investment returns. Investment bonds may be tax effective depending on your personal marginal tax rate, and generally for marginal tax rates above 30%.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.