BROUGHT TO ACCOUNT
Since our two girls were born (aged 4 and 17 months), I have put $50 a week into separate accounts for them. Our four-year-old has more than $7000 in her account and our other daughter has $2000. We paid tax on the interest. As the accounts are becoming quite substantial, what is the best way to invest it for their education? R.G.
Insurance and friendly society bonds are basically tax-paid managed funds, with a fairly high rate of tax at 30 per cent a year before the returns are declared, but are poor performers and I'm not keen on them. Some specialise in saving for education expenses but they can be inflexible and, again, I don't recommend them.
While you continue to be signatories on the children's accounts, the money will continue to be taxed in your name. For long-term investments such as these, I prefer a mix of term deposits and direct shares, focusing on blue-chip stocks offering a franked dividend, or a top managed fund such as Perpetual's Industrials fund or the Fidelity Australian Share fund.
If you plan to adopt this strategy, I would wait a few months. I suspect sharemarkets may get volatile.
TERM RATES FOR SUPER
In a recent column, you wrote: "If you shop around, there are some reasonable term deposit rates being paid within super funds." Where can one find out about these? P.P.
For fixed-rate returns in a super environment, Defence Bank has been offering the best returns. Its retirement savings account (RSA), which is a super fund in the form of a deposit account, is offering 4.75 per cent for six months, and 4.5 per cent for 12 months. (All these rates are before 15 per cent tax for accumulation funds, untaxed for pension funds.) By comparison, the Commonwealth Bank's Superannuation Savings Account is offering just 2.45 per cent for one year, rising to 2.85 per cent for five years.
You can roll money between any standard super fund into and out of these RSAs.
Looking at term deposits within super funds, Colonial First State offers access to CBA term deposits via its FirstRate Term Deposits. These range from 3.95 per cent for three months to 3.75 per cent for 12 months for the retail First Choice Super Fund, rising 0.25 per cent for the First Choice Wholesale Super Funds.
OnePath is offering ANZ term deposits from 4.5 per cent for three months to 4.55 per cent for five years through its OneAnswer and OneAnswer Frontier super funds.
All of these RSAs and term deposits are protected by the government guarantee up to $250,000 per individual per institution and are net of fees.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1300 780 808 pensions, 13 23 00.
Frequently Asked Questions about this Article…
What's the best way to invest money I've been saving for my children's education?
For long-term education savings the article recommends a mix of term deposits and direct shares — focusing on blue‑chip stocks that pay franked dividends — or investing in a top Australian share managed fund, for example Perpetual's Industrials fund or the Fidelity Australian Share fund. Remember that while you're signatories on the children's accounts the income is taxed in your name.
Are insurance policies or friendly society bonds a good option for saving for education?
No. The article says insurance and friendly society bonds are basically tax‑paid managed funds that face a relatively high tax (about 30% before returns are declared), tend to be poor performers and can be inflexible, so they are not recommended for education savings.
Who pays tax on interest and investment returns in children's accounts?
While you remain signatories on the children's accounts, the money is taxed in your name. The article notes the parent paid tax on the interest earned in the children's accounts.
Should I invest the children's savings in shares now or wait for market conditions?
The adviser in the article suggests waiting a few months before moving into shares, because sharemarkets may become volatile. If you adopt the strategy of shares plus term deposits, consider timing and your risk tolerance.
Which managed funds were mentioned as good options for Australian share exposure?
The article specifically mentions Perpetual's Industrials fund and the Fidelity Australian Share fund as examples of top managed funds suitable for long‑term Australian share exposure.
Where can I find competitive term deposit rates inside superannuation funds?
The article lists several options: Defence Bank's Retirement Savings Account (RSA) was offering 4.75% for six months and 4.5% for 12 months (rates quoted before 15% tax for accumulation funds); Commonwealth Bank's Superannuation Savings Account was around 2.45% for one year rising to 2.85% for five years; Colonial First State offers CBA FirstRate Term Deposits (about 3.95% for three months to 3.75% for 12 months for retail First Choice, with higher rates for wholesale); and OnePath was offering ANZ term deposits from 4.5% for three months to 4.55% for five years via its OneAnswer and OneAnswer Frontier super funds.
Are RSAs and term deposits inside super covered by government deposit guarantees?
Yes. The article states that these RSAs and term deposits are protected by the government guarantee up to $250,000 per individual per institution, and the quoted rates are net of fees.
Can I move money between my standard super fund and these retirement savings accounts (RSAs)?
Yes. According to the article you can roll money between any standard super fund into and out of these RSAs, which makes it possible to shop around for competitive fixed‑rate returns inside super.
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