The Best Way to Invest for Your Children in New Zealand Part 2- What to Invest

This is the second part of my investing for children series. In a previous post, we talked about why should we invest for your kids and what you need to know beforehand. Now, let’s dive into what to invest for your children in New Zealand.

Index Fund & ETF for Kids

In case you don’t know, I am a big fan of the low-cost index fund and ETF because this is a low-cost investment option with a diversified portfolio and low entry requirement. Naturally, I will put my kid’s investment into them as well as a managed fund with ETF and Index fund in it. However, lots of investment services won’t accept anyone who is under 18 years old as investors. Basically, under their terms and conditions, you will have to be 18 years old or over to sign that agreement. Therefore, there are not a lot of choices for children.

 

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Looking for investment options for my kids

Furthermore, a good investment for kids is kind of the hidden gem out there. The one that advertised heavily aren’t very good, and you will have to dig deep to find the good ones. After lots of googling, emailing and reading, here are my top picks.

SuperLife MyFutureFund

Hidden Gem No.1 is Superlife MyFutureFund. This is a different service from SuperLife KiwiSaver and SuperLife Invest (non-KiwiSaver Service). This service doesn’t have a web page at the moment so you won’t find it on SuperLife web site. The information is buried under SuperLife Invest Product Disclosure Statement, page 26 and 27 of that PDF file.

(Superlife is currently redesigning their web site. MyFutureFund page will return after that.)

MyFutureFund itself is NOT an index fund or managed fund, it’s just a way that allows children to invest in SuperLife’s product. The account is in the child’s name but the guardian/person opening the account has control of the account including access to the funds through until 18 years of age. The account is separate from parents account, but you would be able to view the account through a “linked” membership.

MyFutureFund has access to the all Superlife investment options. There are over 40 different investment options available for kids including ETF, index fund, sector fund and managed fund. My personal picks for my kids are SuperLife 100 and Overseas Shares (Currency Hedged) Fund.

SuperLife 100 is made up of mostly Vanguard Index fund and ETF plus fund from Somerset. The investment included, 55% of international shares, 33% of Australasian shares and 12% listed property. The management cost is 0.52% and risk indicator at level 4. Three years return after tax (PIR at 28%), and fees are 8.35%. Seven years return is not available.

Overseas Shares (Currency Hedged) Fund is made up of eight Vanguard ETF. Invested 100% in international shares and mainly in US and Europe stock market. The management cost is 0.48% and risk indicator at level 4. Three years return after tax (PIR at 28%), and fees are 7.52%. Seven years return is 11.47%.

I picked those two funds because they are both diversified and contain 100% growth asset. Regarding fees, the management fees are relatively low, and SuperLife’s annual admin fees are only $12/years. They do not have regular contribution requirement, minimum investment amount can be just $1. So Superlife is great for both regular and irregular investing for your kids. I already got an account with SuperLife on my own so linking the kid’s account is straightforward and easy.

What about Investment for Mid-term

Those two fund that I suggested were 100% growth asset, so they are aggressive fund. They provide a great return on long-term investing. However, they will be too risky for mid-term investment. If you plan to use that money within 4-10 years, you may consider some other fund with lower growth asset.

SuperLife 30, 60 and 80 are similar to SuperLife 100 but added a different percentage of income asset. Fund with more income asset will have a lower range of gain and loss in any given year, and better return during recession compare to 100% growth asset fund. On the other hand, when the market is booming, that fund will have a lower return.

I think Superlife 30 will be ideal for 4-6 years investment, Superlife 60 will be great for 6-8 years, and Superlife 80 will be ideal for 8-10 years. For example, if your kid is 12 years old and planning to use that money for the university at 19-year-olds. Your investment timeframe will be 7 years, and you should consider Superlife 60. For any plan under 4 years, term deposit with the bank is a good choice.

How To Join MyFutureFund

SuperLife doesn’t have the easiest way to join so there is how you can join them. You will need to fill in the application form from SuperLife and send it over by mail or email.

  1. Download and read SuperLife Invest Product Disclosure Statement
  2. Go to Applications form (page 22 of the PDF file) and fill out your kid’s details and use a separate email set up for kids investing.
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  3. Under Saving section, you choose how you are going to invest. It can be one lump sum investment, regular investment or both. The example below starts with $500 lump sum investment with NO regular contribution.
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  4. Fill out the Communications and ID verification. You should be using NZ passport or NZ Birth Certificate for the kid.
  5. Under Investment strategy, they will ask if you would pick their managed fund first.  If you wish to join SuperLife 100, just tick as below.
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  6. If you wish to join other funds or join multiple funds, you’ll need to tick “My Mix” and go to the next page.
  7. At page 5 of the application form (page 26 of the PDF file), fill in initial investment or regular investment. You can set the amount by actual dollar value or by percentage. At the example below, I invest 50% to Superlife100 and 50% to Overseas Shares (Currency Hedged Fund).
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  8. On the right side of My Mix page, you can decide what to do with your investment income. They can be reinvested into the fund or save the return in cash fund. Reinvestment is the most common choice for kids. Below that, you can decide rebalancing options, I suggest to use the standard rebalancing for the kids.
  9. At the next page (page 25 of the PDF file), after you pick the beneficiaries (usually “My estate”), DO NOT sign at the bottom. You should move onto the next page.
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  10. At the next two pages (Page 26 and 27 of the PDF file), you will have to fill in your own information as the guardian, supply the ID information, and sign it.
  11. Once you completed the application form, you can send it over to SuperLife, and the investment account will be ready in a couple days.

If you have any other questions, contact Superlife with superlife@superlife.co.nz or call them at 0800 27 87 37.

InvestNow’s Vanguard Fund

The second gem is InvestNow. InvestNow is an online investment platform provides multiple investment funds for their investors with low entry requirements and no middle-man fee. You can check out my blog post on InvestNow here. Unlike other investment services, InvestNow’s term and condition do not have an age restriction. Therefore, InvestNow opens the door are a whole range of investment fund for your kids. You can check out the full range of investment fund from InvestNow here.

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Out of all those investment options, my pick for my kids is Vanguard International Shares Select Exclusions Index Fund.  That fund launched for AUS and NZ market in late 2016. It contains about 1500 listed companies across 20 developed international markets (without Australia). This fund is an ethical fund as they excluded Tobacco, controversial weapons and nuclear weapons investment.

The BEST things about this fund are the cost. It only charges 0.20%/year on management fees and NO annual admin fee. The fund itself is a wholesale fund, which means it usually only accept institutional invest. The minimum initial investment required was AUD 500,000. The good news is, investors can join this fund via InvestNow with just $250 investment. (InvestNow will lower that requirement to $50 shortly.)

There is two version of this fund, one with NZD currency hedged with 0.26% management fee and one without currency hedged with 0.20% management fee. Without currency hedge, the fund is exposed to the fluctuating values of foreign currencies. So this fund will have a higher risk and lower cost. On the other hand, you will pay a higher fee for a more stable return with the currency hedged fund.

Here is the link to check out those two funds in details.

Vanguard International Shares Select Exclusions Index Fund

Vanguard International Shares Select Exclusions Index Fund – NZD Hedged

Pay Tax on Investment

Those two funds have a different tax treatment compare to normal PIE fund. With PIE fund, the investor usually just need to submit their IRD number and PIR rate once, then they don’t need to worry about tax. With those Vanguard funds in InvestNow, they are Australian Unit Trusts and will be taxed under Foreign investment funds (FIF) rule. Investors are required to submit their income from FIF and file a tax return every year. If the holding amount is under NZD $50,000, which should be the case for most children investors, you will need to pay tax on the dividend you received with the kids’ RWT rate. If the holding is over NZD $50,000, you will have to calculate your taxable income with either Fair dividend rate (FDR) method or Comparative value (CV) method.

For children investors with portfolio value under $50,000, filing a tax return on dividend received is not too hard. You will need to file a Personal tax summaries (PTS) with IRD, and it can be done online. I will share how I do that with my kids next year. Regarding FDR and CV method, I personally don’t know how to do it. You better to talk to a tax accountant for that.

How to Join InvestNow

InvestNow sign-up process is very straightforward so there won’t be a step by step guide. You’ll need to click on the join link on InvestNow home page and use a separate email address to sign up. After you sign up an account, InvestNow will ask you to provide information on identification. You don’t have to complete that. Instead, contact them directly with contact form or call them at 0800 499 466 and let them know you want to set up an account for your children. Make sure you got the following information ready

  • Email address of the account
  • NZ birth certificate or a passport for a child
  • IRD number of the child
  • PIR and RWT rate for the child
  • Proof of guardian’s address

InvestNow will be able to set up an investment account from here. They can also link multiple child accounts to your current InvestNow account if you have one already.

Update on functions

Currently (at 19 Sept 2017), InvestNow don’t have an auto-invest function, and the minimum transaction amount is at $250. So it’s not the best choice for someone who wants to regularly invest for their kids because they will have to transfer $250 into InvestNow, then login to their platform and manually invest that money into the fund. The Good news is InvestNow will implement auto-invest function and lower the minimum transaction limited to $50 shortly. So Investors can set up instruction to let InvestNow automatically invest into your preferred fund everytime you transfer money to them.

(Update, InvestNow added auto-invest function with minimum $50/transaction.)

Conclusion

Here is the breakdown of my top picks compare to our kid’s investment requirement.

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  • Superlife MyFutureFund provides a full range of fund for different investment timeframe. They have all necessary function for you to setup different investment plan for your kids. A great “set and forget” solution. However, they don’t have the lowest fee.
  • InvestNow allows user to invest in a great Vanguard investment fund with 0.20% management fee and no annual fee. However, you will have to do the tax return for your kid every year.
  • Feel free to contact them before you sign up and understand the process. I found both companies are great with answering customer questions.

In next part of my investing for kids series, we will look at some other investment options including KiwiSaver, Bonus Bond, SmartShares and more. If you are currently invested in or considering some investment program for your kids and want me to cover them, drop me an email at thesmartandlazy@gmail.com. I will try my best to cover that.

Breaking News: Happy Saver has a Podcast!

Attention all podcast lovers, for too long the NZ savings and early retirement community has been dominated by American, Australian and even British content and stories. While the principles of saving and investing are the same everywhere the specific examples of 401k accounts or Roth IRA’s or Australian self managed super are not that helpful in the NZ context.

Now that all changes, the fantastic Ruth has created a podcast to accompany The Happy Saver blog. 

Check it out on her site or subscribe via your preferred podcast app:

http://www.thehappysaver.com/podcast/

The Best Way to Invest for Your Children in New Zealand Part 1 – What You Need to Know

(This post was originally posted on thesmartandlazy.com on 12 Sept 2017.)

I am a father of two pre-school kids and I been researching on how to invest for them in New Zealand. There are some options out there, but the good one is surprisingly hard to find. So here is my finding on the best way to invest for your children and what you need to know.

There is a lot to write about investing for kids, so I am breaking this topic into three parts. I will talk about why invest for your children and what you need to know before investing here. Part 2 will be my pick on the best investment options for kids and part 3 will be my view on some other investment options in New Zealand.

Why Invest for Your Children

Education: The main reason I invest for my kids is that I want them to know about personal finance. I personally know a few smart and bright teenagers who are horrible with money, which leads them to big money problems (I used to work in student accommodation and know lots of students who left home and flatting with others). It seems like we don’t teach personal finance at school and we don’t talk much about money at home.  When some of those kids leave home, they have no idea how to handle money and make a mess with their finances. So for my kids, they will learn about personal finance from a young age. I won’t start them off the complex financial product, but eventually we will get there. That will be a great example to show how their own money is working for them.

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We will start with a piggy bank first, but we will get to managed fund… eventually

Prepare for their future: I can’t predict whats going to happen in the future, so I want to do my best to prepare for it. For now, you can get an interest-free student loan for study, but it is not always the case. Student loan used to carry interest and before that, Univesity used to be free. For my kids, I have no idea what sort of society they will be facing, so it’s always better to have something prepared. No matter if they want to go to Univesity, go overseas, start their own business, there will be some money for them.

Best time to invest: There is a Chinese proverb said something like, ““The best time to plant a tree was 20 years ago. The second best time is now.”. For us, we can’t go back 20 years ago and invest for yourself unless we get our hands on a DeLorean DMC-12. At least we can do it for our kids. “It’s not timing the market, it’s time in the market.” By investing at their young age, that investment will have all the time in the world to grow and ride out of recession. It almost guarantees those diversified investments will have a great return once your kids reach adulthood.

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You can’t go back 20 years ago to start investing, but you can do it for your kids.

There are two New Zealand personal finance bloggers wrote on this topic I think you should check them out. Ruth from the happy saver wrote a great blog post on ‘Teach kids about money’. Ryan from Money for Young Kiwis wrote another great piece on “Should you invest for your children”.

What do you need?

Before we go into the details, here is a checklist of what you need to set up an investment for your kids.

  • IRD number for the kids
  • Set up a new email account for kids’ investing purpose
  • Identification document for kids (Birth cert, Passport)
  • Identification document for guardian (Passport, Driver license)
  • Prove of relationship between guardian and child (Birth Cert)

Tax Matter

Some people think children do not pay tax as they have little or no income and that is not true. No matter how cute your kids are, IRD is going to charge tax on them. There is two type tax your kids will be paying, Resident withholding tax (RWT) and Prescribed investor rate (PIR).

Resident withholding tax (RWT) will be familiar to most people because you can see that on your bank statement when you received interest. Resident withholding tax is a tax deducted from a New Zealand tax resident customer’s interest income before they receive it. So it’s basically a tax on your interest and dividend received. Your kids will be using this tax rate if they earn interest from bank deposit or receive a dividend from shares.

Prescribed Investor Rate (PIR) is the rate at which an investor pays tax on their share of taxable investment income from a Portfolio Investment Entity (PIE) investment. It basically taxes on your investment funds like KiwiSaver, index fund and managed fund.

All investment service require IRD number so you MUST register your kid with IRD. If your children don’t have an IRD number, go to this website and get an IRD number for your child. You can check out IRD website to find out the correct RWT and PIR for your kids.

Tax Rate Difference between Adults and Kids

For most kiwi kids who have no income, their RWT and PIR will be at 10.5%.   This tax rate is important because average working adult RWT is at 30% or 33% and PIR at 28%. So kids pay much lower tax compared to an adult, and this is a great advantage for kids.

Some parents already set aside some money to invest for their kids under their name because of convenience. There is nothing wrong with that, but it’s not tax efficient. Let’s look at an example below:

Parent A and B both put $500/years into an investment fund with an average return at 7% after fees before tax. Parent A invested under their own name with PIR at 28%. Parent B invested under their child name with PIR at 10.5%. Here is the result after 15 years.

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Parent B’s fund ended up with a higher balance because it was taxed at 10.5%. The actual tax paid with PIR 28% was 1.4% of the fund and 0.525% with PIR at 10.5%. The different is just 0.875%/year. When the kids paid less on tax, more money kept in the fund to grow.  At year 15, it resulted in 7.39% different in value.

Remeber, your kids are NOT your tax shelter. Don’t put your own investment and life-saving under your kid’s name to pay less tax. IRD may treat that as tax evasion, and this is a criminal offence. When you invest for your kids, that money supposed to be their money or planning to use for them.

Skip the Bank Account

A popular thing parents do for their kids is to set up a bank account and put money into it for saving and earn a bit of interest. When I look at bank saving, it’s a safe option but not a good investment. Yes, you do earn interest from the bank, but the returns aren’t very good. Also, inflation and tax will reduce your return. You may get some interest on that money but it may worth less in the real terms after inflation.

Take a look at the interest rate on high interest saving account from January 2003 to August 2017 below.

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Before 2008, you can get about 4% – 8% interest on your deposit and now is above 2%. Let’s add tax and inflation to those interest rate. I will be using RWT at 10.5% as tax rate here.

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The green will be the real return on bank interest. It was around 2%-4% before 2008, dropped below 0% at 2010 and currently sitting just above 0%. Therefore, if you keep your kids money in the bank as ‘investment,’ the return is only a better than inflation.

For me, I will still open a bank account for my kids, but the purpose will only be temporary saving. The bank account is not an investment for my kids, it’s just a safe keeping.  Most of their money will be sitting in some funds.

Long-Term Investment

Some parents may think investment funds are too volatile for their own risk appetite, that’s why they choose saving account. This is true as saving account provide a low but safe return, investment funds’ return can range from 20% to -20% in a single year. However, we need to separate parent’s risk appetite with kids.

Kids have a lot more time ahead of them compared to their parents. For an average Kiwi kids in an average income family, here is a list of some life events that they may need to use that investment fund.

  • Pay for tertiary study at 18-20 years old
  • Moving out for job or school around their 20s
  • Overseas experience around their 20s
  • Buying their first home between 20-35

Most of those events happen around their 20. If you kids are under 10 years old, the investment time frame will be at least 10+ years for them. The common wisdom is you should take more risk when you have a long investment time frame. You shouldn’t worry too much about market downturn as they will definitely occur within their investment timeframe. By staying in the market for a long-term, you will ride out of the recession.

Investment Requirement for Kids

As we’ve established, Kids have different tax treatment, long investment time frame, and higher risk appetite compares to adult. Furthermore, Kids investment fund usually started with a small amount without regular contribution. Therefore, the investment requirement will be different as well. Here is a list

  • Age requirement: Must accept under 18 investor
  • Investment Time Frame: Mid to long-term
  • Risk: Medium to High
  • Asset mix: Mostly growth asset
  • Tax treatment: Prefer multi-rate PIE fund or RWT
  • Management fee: As low as possible (of course!)
  • Annual admin fee: As low as possible for good reason
  • Initial investment amount: As low as possible
  • Lump sum investment amount: As low as possible
  • Regular contribution: Prefer not to have regular contribution commitment

The reason we prefer not to have regular contribution is that kids don’t have a regular income. They may only get money once or twice a year for their birthday or Christmas gift. So we prefer an investment without regular contribution commitment, low initial investment and low lump sum investment amount. Parents and relatives can put in some money, no matter a little or a lot, whenever they want.

Watch Out for Annual Fees

Regarding fees, the amount of annual admin fee can be more important than management cost because that fund usually started with a small amount. When you investment fund valued at $20,000, that $30 admin fee is just 0.15% of your holding. However, if your fund valued at $500, that $30 admin fee will be 6% of your holding. Way more than the usual management cost you will be charged. So we prefer an investment with low annual admin fee.

Also, be aware if you started with a small amount and forgot about it for a couple years, the annual fees may eat up your entity portfolio. Check out the graph below on a small portfolio with $30 annual fees, 7% return after tax and management fee and with no further contribution.

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For those portfolio balance with $200 or less, the annual fees will reduce your investment down to zero within 10 years. You won’t be able to keep your initial investment unless you start with $500 or more(based on $30/year annual fee and 7% return).

Therefore, if you plan to put some money in the let it sit for couple years without any contribution, you should start with $500 or more. If you plan to put some more money in at least once a year, you can start at around $250. Anything less than $200 should be kept in the bank. Also, pick an investment service with low or no annual fee will help.

What’s Next?

This is part one of my investing for kids blog. Next part will be my personal pick of the best investment options for kids and how to join them. Part three will be my take on other investment options in New Zealand.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

One guide that all New Zealand investors should read

For years now one of the most sensible, reliable and accessible commentators on investing in NZ has been Mary Holm. She runs seminars, advises government agencies and working groups, writes a great column for the NZ Herald and is generally just New Zealand’s favourite financially savvy auntie.

New Zealanders are not always the best with financial literacy. We are often more scared than we should be of the sharemarket, we are famously not scared enough of piling ridiculous share of our wealth into investment property. We naively invested huge sums into dodgy finance companies and then the government had to bail us out to the tune of more than $1Bn!  We don’t tend to teach financial literacy at schools, except a few courses run mostly by banks, and many of us learned only the basics (or perhaps just bad habits) from our parents.

Thankfully the Reserve Bank is here to save the day.  As part of their focus on financial education they commissioned Mary Holm to write a simple booklet to make the complicated topics of saving, investing, and risk simple for everyday New Zealanders. It’s my favourite kind of book, it’s only 60 pages long, has small pages and has lots of pictures, tables and graphs to explain stuff.

Its available FREE to everybody on the interwebz right here on the RBNZ site:

https://www.rbnz.govt.nz/-/media/ReserveBank/Files/Publications/Factsheets%20and%20Guides/guide-upside-downside-a-guide-to-risk-for-savers-and-investors.pdf

Or, if you prefer the crisp feel of a page beneath your fingers. I have limited edition paper copy of the book that I can send out to one lucky winner. Just comment below with your saving and investing questions and I’ll randomly select one lucky winner to send the booklet to.

What’s not to love. A free book which was already free anyway.