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The next generation and investment bonds

Australian parents and grandparents are overwhelmingly concerned for the next generation's financial future, with 96% fearing their children and grandchildren either will not be financially secure, able to afford a property or secure a good education in the years ahead.

Generation Life’s Saving for the Next Generation report surveyed over 1,000 grandparents and parents and found that over half of respondents (52%) worry their grandchildren and children won’t be able to afford to buy a property or live comfortably when they reach adulthood. Parents are also concerned a good education will be unaffordable for their children, a concern shared by grandparents.

Despite considering the financial well-being of the next generation a top priority, more than half of parents (53%) are not currently saving to support their children financially and two-thirds wished they had started earlier, by 10 years on average.

Only 15% of grandparents admitted they are saving for their grandchildren’s future, with half believing they should have started at least 12 years earlier.

A child's financial future is a broader family effort

There has been a structural shift over the last 20 years. The price of housing and education has accelerated so much that the average family has to consider how they will assist their children with these two large and expensive milestones. The median cost of a house in Sydney and Melbourne has gone past the million-dollar mark and a private school education can come close to half a million dollars.

Most parents are concerned they are not saving enough for their children’s future. Mothers are more likely to save for their children’s higher education or school fees, while fathers are more likely to save to transfer wealth. Nearly all respondents revealed that they want to pass on good financial knowledge to their kids.

Of the respondents that are currently saving for a child’s financial future, the majority of grandparents and parents are using cash and term deposits, followed by managed funds and property investments.

Deposit accounts are well understood, they are widely available and they are visible, next to people's everyday financials. They are also simple. People generally use deposit accounts in two ways: they set up an account in their child's name, or they set up a separate account in their own name and 'ring-fence' it for future spending.

Allowing time for investment bonds to work

When thinking about securing your child or grandchild's financial future, including big purchases such as houses or education, you have time for investment returns to work hard. That's where investment bonds can assist. They provide a wide range of investment options, with the advantage of a 30% tax rate for those on higher personal marginal tax rates. These benefits, compounded over time, can make thousands of dollars of difference.

Investment bonds have been around for almost 40 years. They were a more popular long-term savings vehicle until superannuation was introduced. However, investment bonds avoid the constant changes to superannuation that frustrate savers, with liquid and flexible alternatives and potential tax efficiencies.

Investment bonds can help in saving for retirement as there are no restrictions such as contribution caps, age limits or ‘work tests’. You can also access your funds before retirement age, with no restriction on how much you can access.

Three tips for parents and grandparents to save for the next generation are:

Start now. Saving early is the best way to harness the benefits of compounding. Starting small and saving regularly can turn $100 a week into more than $50,000 over 18 years. It's best to save in a fund that provides good long-term returns in a tax-effective environment with low fees.

Share your knowledge. Talking about saving with your children and grandchildren is a great way to educate them with good money habits that last a lifetime. Allow them to participate in family budgeting and spending. When they start earning their own income, use it as an opportunity to help them save and invest for themselves, choosing products that are suited to their needs.

Invest in growth assets. With house prices and school fees rising faster than inflation, savings must keep pace. Investing in growth assets like shares and property are a better choice than cash over time. For example, a balanced index fund through an investment bond is a good way to set and forget, keeping fees low.


Catherine van der Veen is CEO of Generation Life, a leading provider of investment bonds. This article is for general information only and does not consider the circumstances of any investor.



The gift of education and the cost of funding it

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