I often have clients ask about how they should best save for their child’s future, whether that be for higher education, a car, house, or investment. The tax laws severely punish passive income for under 18’s by taxing the income at between 47% to 68% for any income above $416 per year. For this reason alone, holding investments in the name of your child is going to lose a big chunk of any savings.
Here is where insurance bonds are and old but effective way to save for your kids. They’ve been around since before Sean Connery, but they’re still an attractive option, just like Daniel Craig, if he takes your fancy!
The bond is like a managed fund where the insurance company invests your savings and reinvests any income, and the tax on any earnings is paid by the company at the company tax rate of 30%. And best of all, once you own the bond for at least 10 years, any withdrawal is completely tax free.
Insurance bonds are a fantastic tax effective option for anyone earning more than $37,000 pa, or have kids. Companies such as AMP and Austock are one of many that offer these types of investment products, but as always do your research and read the fine print, or get independent professional financial advice.
For further explanation of how bonds work:
Be aware that there are companies out there offering similar investment products that take advantage of these tax effective structures, but they can be very restrictive and expensive. Please read this article by Scott Pape “The Barefoot Investor” about Australian Scholarships Group for a down to earth perspective.