Should we set up super accounts for our pre-teen kids?
When asked about setting up an investment for children (often with a future house deposit in mind), I noticed that no one in this context was talking about opening a super account for children. It looks like it would have benefits; If income is transferred to the children from the family trust, the children can avoid paying tax by making it a concessional contribution.
The money can then grow tax-free if the money invested in the pension funds is allocated in accordance with the super savings plan. My children are 10 and 12 years old. But no one is talking about this approach, and I think there’s a good reason for that. Where does this approach fall?
Thank you for your question and observation. It is true that super does not come up much in these discussions.
There are a few points where your strategy breaks down. First of all, your children cannot pay privileged contributions because they do not have any earned income. Family trust distributions do not meet this requirement. Therefore, distributions to children under 18 are subject to harsh minor tax rules.
Let’s say you made those distributions anyway, paid the tax, then deposited the funds into the retirement fund as a nonconcessional contribution. Earnings under retirement are then taxed at 15 percent, so they are not tax-free as you point out.
This money is now locked in the retirement system and cannot be accessed until at least age 60; The main exception to this is the first home super savings (FHSS) scheme, where voluntary retirement contributions can be released to add to the home deposit.
So what happens if your kids don’t buy a house? Or what if they need money for another purpose? Additionally, the maximum amount that can be withdrawn under FHSS is $50,000 per person.
I noticed that the US stock market has been performing strongly recently, while our local market is struggling. Should I allocate more of my investment money to the US right now?
The US market is performing strongly due to optimism about the impact of artificial intelligence (AI) and a pro-business environment. There is a high level of concentration in the technology sector in the US market; The largest companies, sometimes referred to as the “Magnificent Seven,” make up about 30 percent of the S&P500 index.
Therefore, increasing your visibility in the US market will be a bet for the success of the technology sector, at least in the short and medium term.
Our market is also heavily concentrated, with over 30 per cent of the ASX200 being made up of the financial sector (banks) and 25 per cent being resource companies. Australia’s 10 largest companies make up more than 45 per cent of our index.
Morningstar recently wrote an article highlighting the unintentional risk that Australians may face by holding the majority of their wealth in residential property and Australian shares. The real estate market is driven by our economic success, which increases wages and wealth.
This economic success is largely due to our commodity exports. If there were a disruption on this front, commodity stock prices would be expected to fall, and as the economy slows, home prices could also fall. This could lead to mortgage defaults, which could be bad news for your bank stocks.
Suffice to say, it makes perfect sense to diversify your portfolio beyond our shores. As for how you should direct your investment money right now; This is a discussion that should take place between you and your financial planner based on your goals and current assets.
Paul Benson is a Certified Financial Planner. Guidance Financial Services. He is hosting Financial Autonomy podcast. Questions: paul@financialautonomy.com.au
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Paul Benson is a Certified Financial Planner and host of the Financial Autonomy podcast.
