KEY POINTS:
This Christmas, like every festive season, piles of toys will be abandoned by Boxing Day.
But one gift that outlasts the summer is money, and as many as four in five children receive money as a Christmas gift.
However, some things have changed since last Christmas. One of the changes is that investing for children has become a whole lot more effective. That's thanks to KiwiSaver and also to the new tax treatment of some managed funds - called Portfolio Investment Entities (Pies) - which significantly reduces the tax children pay on investments.
Children of any age - or parents and grandparents on their behalf - can open a KiwiSaver account and get the same $1000 kickstart from the Government that an adult gets. If you choose the right KiwiSaver account that doesn't require regular monthly payments, then the money can simply sit there and grow.
The downside is that minors don't get the ongoing tax credits, which makes KiwiSaver no more attractive than other investments in terms of return.
KiwiSaver's big advantage over other investments, however, is that once the money is in a KiwiSaver account, the accumulated investment can only be spent on housing, through the mortgage subsidy, or on retirement.
In contrast, money invested in bank accounts, funds, properties and so on, even via a family trust, eventually finds its way into the hands of those children, who could turn out to be feckless.
The other piece of good news for junior savers this year is the so-called Pie rules, which mean that capital gains made by funds are not taxed, and dividends are taxed at the child's own marginal tax rate - usually 19.5 per cent. In the past, returns on managed funds were taxed at 33 per cent at source - which made such investments difficult to justify.
Individual shares have always been taxed at an investor's own marginal rate, and some children can identify with investments in single companies more easily than they can with a fund. They can visit a Pumpkin Patch shop or Auckland Airport and understand that they own a small portion of these companies.
Another option are the Smartshares funds. These funds track indexes such as the NZX's smartTENZ and smartMOZY funds, which follow the NZX10 index and the Australian S&P/ASX midcap 50 index.
It needs to be said that "saving" and "investing" for children are two different things. Saving is the short-term accumulation of money. More often than not, the children will spend the accumulated money on consumer goods or holidays.
Investing, on the other hand, is for the long term and, if not done wisely, may be virtually worthless by the time the children come to use it. This happened to a friend of mine, who inherited £200 in the 1960s - a hefty sum in those days. The money sat in a low-interest bank account through the high inflation years of the 1970s and 1980s, and was barely enough for a short overseas holiday by the time he got his hands on it.
Over the long term, stockmarket or other high-growth investments may be "safer" than savings accounts, if you view inflation as the risk factor.
Most children will still need a bank account. Children's accounts, such as Westpac's Junior Account for kids, says Craig Dowling, media relations manager, are "Agents Transacts For" accounts.
"What this means is, the account is set up by a parent or guardian who then acts as an agent for the child.
"The account is in the child's name, though only the adult will be able to make withdrawals."
That's good news for parents who don't want the money withdrawn to buy a mobile phone or Xbox. The problem with children's accounts, however, is that the interest rates are paltry. On Monday, major banks including ASB, Kiwibank, Westpac and BNZ, were offering around the 4 per cent per annum mark.
All but one of these banks is offering more than 7 per cent for online call accounts and Kiwibank and RaboPlus are offering 8.2 per cent, so leaving chunks of money in children's accounts for long periods makes little sense.
With this in mind, the savvy way to manage children's savings is to open a children's account, which the adult can control, and an online account, switching money between them to take advantage of the higher rates.
But even at 8.2 per cent, their savings aren't going to keep far ahead of inflation. For that reason, it's worth considering investing in the stockmarket, which should produce a higher return long term.
A problem with investing in any sort of share fund is that the minimum investment is often quite high: some have a minimum lump sum investment of $1000 or more.
One way around this is to buy some of the AMP, Asteron and Tower funds available from the Raboplus.co.nz website, which has a $250 minimum investment. *
Diana Clement is an Auckland-based personal finance and investment writer.
Santa, can I have an investment portfolio?
Blurb1: Giving kids money is nothing new, but KiwiSaver and new tax rules make it an even more appealing gift
Caption1: Father Christmas can bring presents of real value. Picture / Tranz
TextBox1: Choices for kids
Open a KiwiSaver account. Earns $1000 government kickstart. Money locked in.
Invest in a managed fund. New rules mean some funds offer tax advantages. Some require minimum investment of $1000-plus but cheaper options available.
Buy individual shares. Sense of ownership but returns can be volatile.
Put money into a child's bank account. Parents can control spending but interest rates are low.
This Christmas, like every festive season, piles of toys will be abandoned by Boxing Day.
But one gift that outlasts the summer is money, and as many as four in five children receive money as a Christmas gift.
However, some things have changed since last Christmas. One of the changes is that investing for children has become a whole lot more effective. That's thanks to KiwiSaver and also to the new tax treatment of some managed funds - called Portfolio Investment Entities (Pies) - which significantly reduces the tax children pay on investments.
Children of any age - or parents and grandparents on their behalf - can open a KiwiSaver account and get the same $1000 kickstart from the Government that an adult gets. If you choose the right KiwiSaver account that doesn't require regular monthly payments, then the money can simply sit there and grow.
The downside is that minors don't get the ongoing tax credits, which makes KiwiSaver no more attractive than other investments in terms of return.
KiwiSaver's big advantage over other investments, however, is that once the money is in a KiwiSaver account, the accumulated investment can only be spent on housing, through the mortgage subsidy, or on retirement.
In contrast, money invested in bank accounts, funds, properties and so on, even via a family trust, eventually finds its way into the hands of those children, who could turn out to be feckless.
The other piece of good news for junior savers this year is the so-called Pie rules, which mean that capital gains made by funds are not taxed, and dividends are taxed at the child's own marginal tax rate - usually 19.5 per cent. In the past, returns on managed funds were taxed at 33 per cent at source - which made such investments difficult to justify.
Individual shares have always been taxed at an investor's own marginal rate, and some children can identify with investments in single companies more easily than they can with a fund. They can visit a Pumpkin Patch shop or Auckland Airport and understand that they own a small portion of these companies.
Another option are the Smartshares funds. These funds track indexes such as the NZX's smartTENZ and smartMOZY funds, which follow the NZX10 index and the Australian S&P/ASX midcap 50 index.
It needs to be said that "saving" and "investing" for children are two different things. Saving is the short-term accumulation of money. More often than not, the children will spend the accumulated money on consumer goods or holidays.
Investing, on the other hand, is for the long term and, if not done wisely, may be virtually worthless by the time the children come to use it. This happened to a friend of mine, who inherited £200 in the 1960s - a hefty sum in those days. The money sat in a low-interest bank account through the high inflation years of the 1970s and 1980s, and was barely enough for a short overseas holiday by the time he got his hands on it.
Over the long term, stockmarket or other high-growth investments may be "safer" than savings accounts, if you view inflation as the risk factor.
Most children will still need a bank account. Children's accounts, such as Westpac's Junior Account for kids, says Craig Dowling, media relations manager, are "Agents Transacts For" accounts.
"What this means is, the account is set up by a parent or guardian who then acts as an agent for the child.
"The account is in the child's name, though only the adult will be able to make withdrawals."
That's good news for parents who don't want the money withdrawn to buy a mobile phone or Xbox. The problem with children's accounts, however, is that the interest rates are paltry. On Monday, major banks including ASB, Kiwibank, Westpac and BNZ, were offering around the 4 per cent per annum mark.
All but one of these banks is offering more than 7 per cent for online call accounts and Kiwibank and RaboPlus are offering 8.2 per cent, so leaving chunks of money in children's accounts for long periods makes little sense.
With this in mind, the savvy way to manage children's savings is to open a children's account, which the adult can control, and an online account, switching money between them to take advantage of the higher rates.
But even at 8.2 per cent, their savings aren't going to keep far ahead of inflation. For that reason, it's worth considering investing in the stockmarket, which should produce a higher return long term.
A problem with investing in any sort of share fund is that the minimum investment is often quite high: some have a minimum lump sum investment of $1000 or more.
One way around this is to buy some of the AMP, Asteron and Tower funds available from the Raboplus.co.nz website, which has a $250 minimum investment.
* Diana Clement is an Auckland-based personal finance and investment writer.
Choices for kids
* Open a KiwiSaver account. Earns $1000 government kickstart. Money locked in.
* Invest in a managed fund. New rules mean some funds offer tax advantages. Some require minimum investment of $1000-plus but cheaper options available.
* Buy individual shares. Sense of ownership but returns can be volatile.
* Put money into a child's bank account. Parents can control spending but interest rates are low.
