Ask Paul: My teen son wants to start investing - are insurance bonds the way to go?

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Dear Paul,

My teenage son has shown interest in investing some money earned from working a part-time job.

We have had some discussions about options and one that we touched base on was insurance bonds. 

ask paul clitheroe teenage son investing insurance bonds investment bonds

I cannot find a lot of information regarding how many companies still offer this or rates of return, etc, but I wondered what you could tell me about the pros and cons?

Are they a viable option given that the returns would be tax-free if held for 10 years?

If they are not viable anymore, do you have any other suggestions that my son and I could consider? - Alan

It is great that you and your son are talking about money and investment while he is still in his teens, Alan.

I am not actually as fussed about how he invests today; the real value here is the lifetime skills and habits you will help your son to develop.

An insurance bond is quite okay, but it gets down to tax.

Your son is quite entitled to earn an income and pay tax at adult rates on this income. The problem, of course, is "unearned income". This is a real issue as a minor can only earn $416 in unearned income tax free. Above $417 to $1307 it is 66% and then 45% over $1307.

If he was to invest, say $1000, in a low-cost indexed fund or an exchange traded fund in his own name (if the manager allows it) that would be quite effective.

But most investments will need you or your wife to invest as trustee for your son, so you would pay tax on his earnings at your rate of tax. I can see why many just prefer the simplicity of an insurance bond.

But I'd hate him to be paying 30% tax if he did not need to.

This is another terrific conversation to have with your son. Tax planning is a critical skill.

An insurance bond may be the most simple solution, but if he is looking at a globally diversified investment, it may be that the income is very low. Whether it could be held in his name or yours as trustee and at your own tax rate then becomes a good conversation.

In our case, Vicki and I simply held shares for the kids as their trustee and paid the tax for them, transferring the shares to them as they turned 18.

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Paul Clitheroe AM is founder and editorial adviser of Money magazine. He is one of Australia's leading financial voices, responsible for bringing financial insight to Australians through personal finance books, the Money TV show, and this publication, which he established in 1999. Paul is the chair of the Australian Government Financial Literacy Board and is chairman of InvestSMART Financial Services. He is the chair of Financial Literacy at Macquarie University where he is also a Professor with the School of Business and Economics. Click here to ask Paul your money question. Unfortunately Paul cannot respond to questions posted in the comments section. Please view our disclaimer here.
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May 12, 2022 9.40am

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