It’s natural to want the best for the children and grandchildren in your life. They’re growing up in a world that’s changing fast, and in some ways it’s an uncertain future. Luckily, there are a number of ways you can set your kids up for a more secure financial future.
Many parents and grandparents want to put away some money for their children’s future but aren’t sure which account to choose. With so many factors to consider, from tax implications, returns earned and investment volatility, it can be hard to know where to start. In this article we compare saving in a bank account to savings in a super fund and consider the pros and cons of both.
Saving in a bank account
We’re all familiar with bank accounts – you can deposit money into them, withdraw funds easily, and they often earn interest. Bank accounts are considered a low risk type of investment, as the returns earned tend to be stable over time. However, bank accounts provide a low potential return, which means the amount you put into a bank account may not grow very quickly. In some cases, the return earned on a bank account only equals inflation, so in real terms your money isn’t actually growing.
Saving in a super fund
A super fund is a tax effective type of long-term investment. Like a bank account, you can transfer money into a super fund, however you can’t take it out until you meet a condition of release, such as retirement. The money you put in a super fund is pooled together with other super fund member’s money and is invested professionally by investment managers. The money is generally invested across a diversified range of asset classes and sectors.
At Student Super, we offer three investment options for members; Balanced, Growth and High Growth.
The Balanced option is likely to have the lowest short term fluctuations in returns, but provides the lowest potential for long term returns.
The Growth option is likely to have greater short term fluctuations in returns, and provides higher potential for long term returns, compared to the Balanced option.
The High Growth option is likely to have the greatest short term fluctuations in returns, but provides the highest potential for long term returns, compared to the other options.
It’s important to remember that super is a long-term investment and that if you open a super account for a baby, their money could be invested for 65 years!
So what are the pros and cons?
Bank accounts
- Money is easily accessible and can be withdrawn at any time.
- Considered to be a low risk investment type with reliable returns.
- Low potential for return, which means the money may only grow by a small amount over time.
- If your child is under 16 and earns interest between $120-$420 p.a., they will be taxed at 47% if they do not provide their date of birth or TFN to the bank. If they want the tax refunded they’ll need to lodge a tax return.
- May need to go into a bank branch to open an account.
Super funds
- Takes advantage of long-term compound interest (giving their money many extra years of potential growth).
- Investment safeguards – super is highly protected in Australia and cannot be accessed until a condition of release is met.
- Professionally managed funds – Student Super members are invested in Macquarie and BlackRock funds or Westpac cash management accounts, depending on their balance.
- Tax benefits – super is a concessionally taxed investment method.
- Easy to open an account – with Student Super you can open an account online in less than 5 minutes.
- Money cannot be accessed until a condition of release is met, so you can’t withdraw the money at any time.
- Need a TFN to make personal contributions (transferring from a bank account into a super fund).
We hope this article helps you have a better understanding of the different ways to save for your children’s future. With a clearer idea of the advantages and disadvantages bank accounts and super funds offer for kids, you can help your kids and grandkids get set up for a more secure financial future.
Check out Student Super’s wealth generation feature Golden Goose Gifting - this helps parents and grandparents gift into a child’s superannuation account. If you’d like to give your kids and grandkids a great head-start, consider the difference super could have on their long-term wealth.
