Many parents and grandparents have bank savings accounts set up to benefit their children and grandchildren. Usually they start small and have amounts added on birthdays and other occasions. The lead-up to Christmas is a good time to start or review these plans.

The interest rates available now are higher than in the 2020-2022 period but remain modest. With the children still young these are long term investments, so a small extra percentage return will make a big difference to the end benefit. Parents and grandparents should consider other options.

The easiest alternative is managed funds. These are run by professionals and invest in income securities, shares and property in Australia and overseas. Exposure to growth assets means they will earn higher returns long term, up to around eight per cent per annum or more.

Contributors can choose to invest conservatively, with the majority in fixed interest, or for higher growth with more money in shares, property and infrastructure. The growth assets will earn higher returns long term, but with more variation along the way.

Managed funds allow contributors to open an account with a small amount, as low as $1,000 in some cases. They can then add amounts regularly by automatic credit, or ad hoc as it suits them.

Accounts can be set up in the name of the contributor as trustee for the child, but income earned will need to be reported in the contributor’s tax return unless the child has a tax file number. This means the contributor may have to pay tax but will also receive any imputation credits attached. 

Another investment option is to buy shares in major companies in trust for the child. As it is a long-term plan only major blue-chip companies that can be relied upon to endure should be considered. Suitable companies could include the four major banks, BHP, Rio Tinto and Wesfarmers.

The dividends the shares pay should be reinvested wherever possible. Again, the income would need to go in the contributor’s tax return.

A third investment option is tax-paid investment bonds. These invest in all areas including growth assets for high returns. They pay tax internally, so no income need be declared in anyone’s tax return. They also pass automatically to the child on the adult’s death, bypassing their estate.

If the grandparent receives an age pension, opening investment accounts for grandchildren won’t usually reduce their assessable assets for Centrelink purposes. The contributor is still the legal owner when calculating their pension entitlement.

Start a long-term investment savings plan for a child this Christmas.