Investing money in an account or trust fund can be a helpful tool for passing assets onto your descendants. One of the best things about being a grandparent is being able to help your grandchildren reach their life goals and dreams. There are a number of different ways you can invest money to help your grandchildren out later in life. You can:
- Help pay for a quality education
- Take them on adventures to help them best experience life
- Create a funeral plan and make pre-arrangements so they won’t need to cover costs
- Ensure you have a Last Will and Testament in place
Create a savings account
A savings account allows you to make regular or irregular contributions or a one-off payment for your grandchild. This money can be called on as they grow up or it can be locked away until they turn a certain age. You can choose to open the account in your grandchild’s name or you can open it in your name with it held in a trust for your grandchild. Many banks offer free bank fees for children who are under 18 years of age.
- Pros: Savings accounts offer plenty of flexibility and if you get your grandchildren involved in the account they can learn about saving and managing money from an early age.
- Cons: The rate of interest is usually fairly low when compared to other forms of investments.
Open a term deposit
Opening a term deposit allows you to put away a set amount of money over a fixed amount of time. The minimum deposit is usually around $1,000. A fixed-term account generates higher rates of interest than a savings account, and balances over $5,000 or $10,000 can attract healthy returns. You can’t add or withdraw during the period but if you know you won’t need access to the money for 30 days to five years, term deposits can be a good investment.
- Pros: Better interest returns than on-call savings accounts.
- Cons: Non-flexible. While some term deposits will allow you to withdraw funds from the account you run the risk of losing some interest.
Use your KiwiSaver
KiwiSaver is a voluntary savings scheme set up by the government to help New Zealanders save for their retirement. You can, however, use it to help your grandchildren purchase their first home or save for their own retirement. You can choose to contribute from 3% to 10% of your gross (before tax) wage and your employer will need to contribute also. In addition, there’s an annual government contribution to bolster funds.
Placing a lump sum into a KiwiSaver for each of your grandchildren can be a great way to help them out when they need it most. Current legislation allows grandchildren to only withdraw savings for the following reasons:
- A first home purchase
- In circumstances of financial hardship
- In the case of serious illness
- If permanently emigrating to other countries (excludes Australia)
Pros: Savings can be continually built upon and you can ensure money is used for the right reasons. Some registered fund managers offer lower-fee options for children.
Cons: Your grandchild’s legal guardians must open the KiwiSaver account for them and other than the above reasons, money is locked away until your grandchild turns 65.
Open a managed account
If you have money to invest and you want to pay a professional to make the investment decisions for you, a managed fund can be a good option. You’ll need to set out your financial goals, how long you plan to invest the money for, and you’ll need to look for a managed fund that best suits your needs. You might like to spread your money across different fund managers to help diversify your money and lower your portfolio risk.
- Pros: Can be a great way for beginners to wade into the waters of investing. Risk can be spread out across a range of assets and products.
- Cons: Various management and administration fees can reduce your returns and there’s a risk that a fund can drop below what you paid for it.
Establishing a trust
Finding secure ways to save money for your grandchild’s future enables you to set guidelines on how you would like the money to be used. It can release funds at key milestones, making graduating university, getting married, or buying a first home can be financially stressful. Making a plan helps protect your inheritance from depletion and generally speaking, savings systems are easy to set up.
When it comes to talking to grandchildren about savings accounts, the conversation about money may seem taboo. It’s important, however, that estate plans are communicated. Tell your grandchildren your goals for the money and provide advice on how they can position themselves to make the best use of the trust. If there’s a difference between amounts left to different children, you may also need to communicate your reasoning for this.