Superannuation has dominated the financial press recently.
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It is the most tax-efficient method of saving for the long term and the proposed May Budget rule changes have been debated endlessly.
Super has drawbacks and is not suitable for many savings purposes. Its most significant problem is that it isn’t available until retirement, or pre-retirement after age 56 but rising to 60.
People saving for future school or university fees, the big overseas trip, the special car or boat they always wanted, or just wanting to invest a little money for a small child or a new grandchild, cannot use superannuation.
What is the best way to save for these purposes while minimising tax?
Saving at the bank is an obvious option but the interest rate is extremely low.
Buying selected shares can also work but they fluctuate a lot and those school fees will arrive ready or not in ten years’ time.
Managed funds spread the risk by holding many investments. If one loses another will be doing well.
Share funds are likely to earn best. Perpetual Industrial Share Fund has averaged more than 12 per cent per annum since 1966, fifty years.
Franking credits help reduce the tax on income earned. Capital gains are taxed leniently with only half the gain taxable.
For those who want a more stable option than purely shares balanced funds may be a good choice. They offer sound growth potential with less variation year to year. They own shares but also invest in property and defensive areas such as cash and fixed interest.
Managed funds can be started with as little as $2,000, or $1,000 if a regular savings plan is attached.
Savings plans can be as little as $100 per month and are an ideal way to accumulate a lump sum by small instalments over a long time.
The question of tax is where things get complicated.
A parent or grandparent can invest as trustee for a child. They will need to quote their tax file number if the child doesn’t have one and may need to convince the Tax Office that the income earned is not theirs.
That is possible but children can only earn $416 per annum tax free. Above that they pay the top marginal tax rate. So it may be cheaper tax-wise to declare income in the trustees’ name, or simply invest in their name in the first place.
An assured way around this problem is to invest in insurance or friendly society bonds. These also offer options investing in growth assets. They pay 30 per cent tax internally on earnings less franking credits. Proceeds including regular savings are tax free after ten years and tax sheltered before.