Ask Paul: What's the best way to invest for grandkids?

Dear Paul,

How can we best invest a lump sum or instalments for grandchildren younger than five years for their education or later use and minimise tax? 

Is there any method by which the money invested will not be taxed, now or later? 

Is there any way this can be avoided from our assets from Centrelink? We are self-funded retirees. - Gian

Gian, I am writing this on a plane as we head to Fiji, as part of my 70th celebrations, with our three adult kids, their partners and four granddaughters younger than six for a family week. I'll need a holiday after this holiday!

Investing for the grandkids is a great idea. Vicki and I do this for our four. As always, this is about personal choice, but I'm happy to start by sharing what we do.

I am completely biased as I chair the company that provides this option, but we use InvestSMART's product called Fundlater.

It took a while for our regular contributions for the grandkids to reach the starting money of $4000, but once we got there, Fundlater then added $6000, which you pay off in monthly instalments, there is no interest, but a monthly account fee.

We now add small amounts at birthdays.

But there are a wide range of options for your grandchildren. Given this is likely to be a 20- year or longer investment, growth investments such as shares make a lot of sense.

You could choose a quality share you like and add to that each year. Brokerage is so cheap these days that adding smaller amounts by buying more shares has become very possible.

But it will be easier, and give you much better diversification, to go with a fund manager. Quite a few of these will let you start with a modest amount and add small amounts on a monthly basis.

You will pay tax on dividends as the investment would be held by you as trustee. But these are typically franked at 30%, meaning tax is paid to 30%.

If you hold investments as trustee for a grandchild, there is no capital gains tax on transfer once the child is older than 18 and can legally hold the investment.

With any age pension you receive, the deprivation provisions allow you to give away up to $10,000 in any one year and $30,000 total over five years.

I should say I really don't favour saving via a bank account for 20 years or so. The low returns will not turn into much.

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