Parents are using KiwiSaver to start investing for their children – but is it the right option?
At Simplicity, 57 percent of its under-18 members are in KiwiSaver.
Chief economist Shamubeel Eaqub said a lot of grandparents were putting money into KiwiSaver so that they could be sure it would be there to help with a first home in the future.
“Especially if the children – the grandchildren’s parents – are not to be fully trusted not to dip into their savings.”
Sian August of ANZ Investments, said KiwiSaver was also the most popular choice for parents investing for their children via ANZ.
“It offers a structured way to save for the future, including for a first home or retirement.
“If a member is 16 years old or older, they are eligible for government contributions and, if employed, they will generally receive employer contributions. An employer can also choose to make contributions for employees under the age of 16.
“Looking at our KiwiSaver members aged under 18, almost 80 per cent are in a growth-oriented fund, and 28 per cent made a contribution in the past two months.”
August said a managed fund would offer more flexibility to access the money before retirement for things like education, travel or other major expenses.
“The right option for a child will depend on a family’s goals and circumstances. But either way, getting started early can make a meaningful difference over the long term.”
She said investing from a young age would give children a head start, whether that was through KiwiSaver or another managed fund. “It is a practical way to help them learn about money, investing and setting long-term financial goals.”
General manager of Sharesies personal Scott Nixon said there were 110,000 investment accounts for kids on Sharesies, “which shows parents, grandparents and caregivers are keen to take advantage of compounding growth to build a financial foundation for the kids in their life.”
He said most investment on behalf of children was into shares and funds, followed by savings accounts. “However, since April when Sharesies started offering KiwiSaver accounts for kids, these have seen strong growth, averaging an increase of 33 percent month on month. Kids KiwiSaver accounts have reached 4500 with average holdings of $650.”
KiwiSaver largely locks money in until someone buys a first home or retires, so it can be a good option for anyone who is worried that money might be otherwise wasted.
But because it is locked in, kids cannot access it for other things they might want to spend money on, like study or travel.
Whether the restriction is a benefit or a hindrance is a big part of many parents’ decision.
Investing in managed funds can be a way to provide access to markets without the rules, for those who feel confident their kids will stick with it.
Parents can open investments in their children’s names at most banks and financial institutions, as long as they can provide an IRD number for the child and proof of identity.
At Sharesies, you can open a kids account for which the parents becomes the trustee for the children. When they are 25, or 18 if you choose, they can take control.
Most PIE fund investments that are held in a child’s name can be taxed at their prescribed investor tax rate, which is usually 10.5 percent. Investments that are in a parent’s name, but intended for use by the child, are taxed at the parent’s rate. This applies to bank accounts, too.
Pie Funds chief executive Ana-Marie Lockyer said it did not have to be a case of KiwiSaver or another investment.
“There’s a good argument for doing both. Starting KiwiSaver young can help build a savings mindset early, so when a young person starts working, contributing to KiwiSaver is already normal rather than something they have to think about starting.
“I made the decision to enrol my kids in KiwiSaver then they were young, so when they got their first job they got used to making their employee contributions before it was in their pocket and allowed for discussion as the benefits of savings. Now they see it as normal. Investing outside KiwiSaver provides more flexibility for other milestones, but whichever approach families choose, starting early, investing regularly and giving compounding plenty of time to work can make a significant difference.”
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