How to invest for your grandchildren

I have four grandchildren aged from eight to 20 and as I am now in my 70s I would like to put something aside for them when they reach 21 or 25. I have read your articles on banking and shares etc but I was wondering if those insurance bonds, which you kept for 10 years tax exempt, were still around. Are they a good investment? L.L.

To my mind, the whole idea of investing money, even when putting it aside for someone else, is to achieve a healthy rate of return, otherwise you could just leave it in a bank account.

I've rarely been impressed with the performance of insurance bonds, even after taking into account their 30 per cent tax on their income. It could be that top fund managers are attracted to where the glamour and salaries are high, such as investment trusts and superannuation funds.

When taking a long-term view, I would prefer to buy shares with dividend reinvestment plans. Right now, I think BHP remains undervalued. ASX requires a minimum $500 share parcel. Alternatively, you can buy "share packs" from eTrade and Commsec. The former offers a pack of 10 shares on its website, starting from $5500 plus an $80 brokerage, while the latter offers four different share packs of six selected shares and you can invest between $4000 and $25,000, with a $66 brokerage fee. Generally, brokers would require you to buy shares in your name "as trustee for" that grandchild until they turn 18.

Alternatively, you could look at a managed fund but you need to be aware of the minimum initial investment required. For example, BT Invest ( a form of wrap account) requires a $1000 minimum into a diversified fund, while trusts from Perpetual and Colonial First State, which offer a choice of managed funds, require $2000 and $5000 minimums respectively. (I should declare I own BHP shares through a super fund.)

I am 52, single and have been an Australian resident since 2004 and a citizen since 2010. I am a British dual national. I own my home outright worth about $1.5 million. For 13 years I contributed to my British company pension scheme, which is a final salary scheme and will pay me an annual amount for life. In November 2015, this amount was estimated to be ??13,539 if I retired at 55, or ??17,537 if I retired at 60. In addition I will receive ??15,458 as a lump sum representing my additional voluntary contributions. These estimates are likely to rise. It seems very hard to find tax advice regarding this income, which I know I am very lucky to be able to look forward to. Financial advisers just want you to transfer it to Australia which I cannot see would be the best plan! My assumption is that this pension will be taxed as normal income in Australia. Will the lump sum also be taxed? I have an option to take part of the pension as tax free cash called a "pension commencement lump sum" and get a reduced annual amount. I am fairly certain that the higher income option will be better, but if I did take the "tax free cash" would it remain tax free in Australia as it would be in Britain? I may decide to semi-retire at 55, but continue to work occasionally. If I receive my British pension from this date too, what would the tax position of any earnings be? I also have $180,000 in super and am contributing the maximum to it. I have no expectation of ever being entitled to an Australian state pension but how would my British pension be assessed under the assets test? R.O.

Regarding your lump sum, since you will have received it more than six months after becoming an Australian resident, then a portion of it, called the "assessable amount" is considered to be taxable income.

The assessable amount of a lump sum from a foreign pension fund is known in the jargon as "applicable fund earnings" or AFE, which is the growth achieved since you became an Australian resident in 2004, a figure which you should be able to get from your British fund (I'd be interested to know if they charge you an actuarial fee!)

This is then multiplied by the ratio of your Australian residency to the total period of ownership. For example, suppose you began your British pension 35 years ago and have been an Australian resident for 14 years then, if the growth in your fund turns out to be $5000, your AFE will be $5000 x 14/35 = $2000 which is then added to your taxable income that year.

In case you have heard that an option exists to transfer the lump sum directly from the British fund to your Australian super fund, where it would be taxed at just 15 per cent, this is only available where you "no longer have a superannuation interest in the foreign superannuation fund" (as it says in the Tax Act).

Your British pension would be taxed as income, reduced by the standard 8 per cent undeducted purchase price covering the amounts you contributed after tax. You can, in fact, apply for a higher UPP but must have the figures to prove it, and most people don't.

As an aside, your "final salary scheme" is known as a "defined benefit fund" in local jargon. As a rule of thumb, the sooner one starts a defined benefit lifetime pension, the better, when added up over a lifetime. When compared with starting the pension later, it usually takes about 10 to 15 years to break even. It may be difficult to do so in your case, as it sounds as though your British pension requires you to retire at 55 or 60, as opposed to simply reaching the required age. If you hope to work beyond age 60, check the wording in the British policy document or ask the fund's representative if sales commission is being paid to that person. If he or she is not helpful, see if you can stop the commission payments!

In a recent Moneysection dated November 5, there was an article about a retired couple where the husband was querying downsizing. The amount of money the couple received from Centrelink interested me and I am after some clarification as to whether the figures are correct? It stated that they BOTH receive the following fortnightly payments: $325 from Centrelink - can you confirm if this is each, or combined? This is on top of the $1500 from his defined benefit - is this $3000 or $1500? Then there is the $570 from his VicSuper (again, is this $3000 or $1500?) And $400 from his wife's HESTA account - $800/$400? Then $50 from a few combined accounts. So at a minimum, I read this as the couple get either $2520 or $5040 a fortnight AND Centrelink payments of $325 (so that's either $2825 or $5365 a fortnight). My reason for the query is that, based on the lesser amount, it seems like they have a fairly good income before the Centrelink kicks in, as I would have thought they wouldn't be entitled to Centrelink (unless it's something to do with a disability or veteran's pension etc?) I have been advised in previous Money articles that my wife is unlikely to be eligible for the age pension (she is 65) due to my superannuation (currently about $1,137,000). My wife receives about $25,000 a year from a previous British superannuation scheme (teachers pension) and the British state pension, while I earn about $107,000 a year before tax. We have a mortgage of about $231,000 and about $24,000 on call in the bank. I am 53 and I will be taking an indexed pension from age 55 (Military Superannuation Benefits Scheme - MSBS), so any advice or clarification on entitlements for my wife from Centrelink regarding the age pension would be appreciated. W.M.

Regarding the age pension's current cutoff limits, the income test cuts off the married pension at $77,917 a year combined, and the assets test at $830,000.

The writer to whom you refer used the term "... each receives ..." but it was fairly obvious that this only applies to the age pension quoted at $325 a fortnight each.

Super pensions are never joint and can only be personal. Where the writer mentioned $50 a week from "combined bank savings of $78,200" which works out 1.6 per cent, which is about what you would get these days, that must be a joint figure, that is you cannot get double that or 3.2 per cent except in long-term deposits.

Adding up their income, and assuming 4 per cent dividends on $17,500, one gets a combined total of about $66,220 pre-tax income a year, or $2547 a fortnight, excluding the age pension, which is not too different from your estimate.

Since defined benefit pensions have no assets to affect the assets test, we will stick to the income test which, to grant an age pension of $325 a fortnight each, the test must measure some $44,100 a year, or $1696 a fortnight, roughly a third less than the cash received.

The income test could result in a figure significantly less than the total cash income if there is a large "undeducted purchase price" or UPP in their pensions. This is quite likely since they retired 10 years ago, well before deeming was introduced for allocated pensions in 2015. The UPP in such pre-2015 pensions consisted of any pre-1983 component plus any non-concessional contributions that is, money contributed after tax. If the latter resulted from a concerted effort to place after tax money into super, such as form the sale of a property, or simply a wise use of the "recontribution strategy" before retirement, there would have been a high tax-free component in their super funds and thus a high UPP.

In fact, if you assume a tax-free component equal to 90 per cent of their two allocated pensions, with none in the writer's defined benefit (which is a conservative assumption), then the figures given for their age pension are almost exact.

In your case, I'm not sure whether your super fund containing $1,137,000 is in fact your MSBS fund, a defined benefit fund. If it is the same fund and you take the full pension then it, too, will not be counted by the assets test and you will need to focus on the income test.

While you are working., your $107,000 salary plus your wife's $25,000 British pension would put you out of sight of any part age pension. You don't mention your age but I assume that, at retirement, you will use the opportunity to withdraw some of the optional 50 per cent lump sum to pay off your mortgage, which may allow a small part age pension.

I am a 49-year-old sole parent with one dependent 16-year-old. I am renting a unit for $350 a week and read your column weekly. I have $133,000 life savings in a Ubank online savings account. Each fortnightly pay, I have $500 deposited into this account with the hope to eventually use it for a deposit on a home. I earn $79,000 a year, have $39,000 in First State Super and $60,000 in the Canadian equivalent of superannuation, RRSPs, which is saved from the 13 years I lived there until 2003. Recently, I started making personal contributions into super of $168 each fortnight with Smart Salaries. My question is: as the Sydney housing market is completely out of my reach at this time, would my money be better put into super or invested in some other way. My brother thinks I should buy an investment property to get a foot into the market as he thinks my money is wasting away in the bank with low interest rates and high tax but I am not confident in this approach as I don't know anything about the property market or how it works. As I approach 50 years, my old age becomes more of a concern to me, especially as I do not own a home. Have you any suggestions? M.B.

I think your savings plan is the best approach for the short to medium term. Unless you win the lottery, you are faced with the long-term choice of either aiming for a home or maximising the amount in super.

This is always a tough choice but I generally favour the former rather than the latter on the grounds that (1) having a home of your own provides both a powerful sense of security and, importantly, (2) eliminates the need to pay rent through retirement when your income is limited while (3) the age pension will be maximised if your savings are invested in your home rather than a super fund.

I know there are some tax savings by salary sacrificing into super, but I would rather you maximise the amount you place into your savings over the next year or two, during which your child will presumably be finishing school. Then keep an eye on Sydney property prices, as there is already talk of double digit price declines. Historically, prices don't fall evenly across the city, but fall most in outer suburbs where too much construction may lead to an excess of supply.

Also, is there any TAFE or other recognised evening course you can take that might result in a job with higher pay? The best investment is often in your own education.

If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial Ombudsman, 1800 367 287; pensions, 13 23 00.

This story How to invest for your grandchildren first appeared on The Sydney Morning Herald.