One of the best things about being a grandparent is the opportunity to set your grandchildren up for a better future. Investing money for them when they’re young gets them off to a great start thanks to the wonders of compounding interest. What options are available to you if you want to kick-start their savings? We look at four popular ways to invest money for your grandchildren.
A savings account allows you to make regular or irregular contributions and the money is on call in case your grandchild would like to spend it on something special. You can either open the account in your grandchild’s name or your own name but held in trust for your grandchild. Rates and fees differ from bank to bank, but normally accounts in the child’s name are free of fees while they are under 18 years of age. Savings accounts offer plenty of flexibility and a great opportunity for your grandchild to learn about saving and managing their money. However, the rate of interest they earn is low compared to other forms of investment.
A term deposit is where you invest a set amount of money over a fixed term to earn a higher rate of interest. Usually, a term deposit will require a minimum investment of $1,000, but balances over $5,000 or $10,000 may attract a better rate of return. Most banks offer investment terms from 30 days to five years. You can’t add to or withdraw from a term deposit during that period (it is possible to break a term investment in an emergency, but you will lose some of your interest). Most term deposits longer than six months allow you to compound your interest on a monthly or three-monthly basis, increasing your return because you then earn interest on the interest. While term deposits generally offer better returns than on-call savings accounts, interest rates are currently at record lows due to the 1% official cash rate.
A managed fund is where your money is put in a pool with that of other investors and invested by the fund manager in a range of assets like shares and property. Managed funds can generate a higher rate of return than a term deposit, but also carry the risk of negative returns (getting back less than you invested) due to fluctuations in the financial markets. There are different types of managed funds, with investment strategies ranging from conservative to aggressive. Generally, conservative funds carry a lower rate of return and a lower risk profile, while at the other end of the scale, aggressive funds aim for a higher return but have a higher risk profile. Managed funds have higher fees than term investments.
New Zealand’s retirement savings scheme, KiwiSaver, is a managed fund available to permanent New Zealand residents that has additional benefits. The money is locked in until your grandchild buys their first home, at which stage they may be able to use all bar $1000 of the money towards their deposit. Other than that, the money is locked away until they are 65. Once your grandchild turns 18, they will become eligible for the annual government contribution (currently up to $521.43). When they start working, they will be required to put a percentage of their salary into their KiwiSaver account. Your grandchild’s legal guardians must open the KiwiSaver account for them, but once it is open, you can make random or regular contributions of any amount. Opening a KiwiSaver account needs to be done through a registered fund manager – some providers have recently started offering a lower-fee option for children.
Regardless of which option you choose to invest money for your grandchild, you will need to provide documentation to open their account – usually their birth certificate or passport. If you are looking to invest large sums, or in any scheme that carries an element of risk (such as a managed fund), it’s advisable to speak to an Authorised Financial Adviser who will help you decide which investment method is best for you and your grandchild.