Investing for Children: How to Build Their Financial Future

Setting your children and grandchildren up for financial success is one of the greatest gifts you can give. Whether you’re a parent planning for future education costs or a grandparent wanting to leave a meaningful legacy, investing for children in Australia can provide powerful long-term benefits.

With the right strategy, time, and investment vehicle, even small contributions today can grow into significant wealth over time. This guide explores key investment options available to families with a special focus on investment bonds for kids in Australia, tax considerations for minors, and a practical worked example to bring it all together.

Why Start Investing Early for Your Child?

The earlier you start investing for a child, the greater the impact of compound growth. Beyond wealth accumulation, early investing also helps children develop positive money habits, a sense of financial security, and opportunities for education or first-home savings later in life.

There’s an old saying that applies here, “the best time to plant a tree was 20 years ago, the second best time is today”.

Investment Options for Children in Australia

When setting up children's investments accounts, it’s important to understand how different structures impact control, access and tax.

Here are the main ways to invest for a child in Australia:

1. Investment Bonds

   1. Investment bonds (also called insurance bonds) are one of the best long-term investments for children in Australia. They are managed investment products offered by life insurance companies, combining investment flexibility with unique tax advantages.

Key benefits include:

• Tax-effective structure: Earnings within the bond are taxed at a maximum rate of 30%, which can be lower than an adult’s marginal rate.

• No personal tax reporting: Investors don’t need to include bond earnings in their annual tax return (unless withdrawn early).

• Long-term growth: If held for at least 10 years, withdrawals are tax-free under current legislation.

• Flexible ownership: Bonds can be set up in a parent or grandparent’s name “on behalf of” a child or transferred later.

• Estate planning advantages: You can nominate beneficiaries, making them ideal for investing for grandchildren in Australia as part of intergenerational planning.

2. Managed Funds or ETFs

You can invest in a managed fund or exchange-traded fund (ETF) in your own name, designating it as being “for” a child. However, income and capital gains are taxed at your marginal rate.

3. Savings Accounts

Children’s savings accounts are a safe, simple starting point but generally offer lower returns compared to investment products. They’re best for short-term goals or teaching basic savings habits.

4. Family Trusts

A family trust can hold investments for children, offering flexibility and control over distributions. However, trusts come with additional setup and compliance costs and are typically more suitable for higher-value portfolios.

Understanding Tax Rates For Minors in Australia

Tax rules for minors are designed to discourage income-splitting which is classed as transferring investments to children solely to take advantage of their lower tax rates.

For the 2024–25 financial year, the tax rates for minors (under 18) on unearned income such as interest, dividends, or investment returns are:

This means even modest investment income can attract high tax if the investment is in a child’s name. That’s why many families use investment bonds or hold assets in an adult’s name until the child reaches 18.

Worked Example:

How an Investment Bond Grows Over Time

Let’s look at how investing for children in Australia through an investment bond might work in practice.

Scenario:

Emma and James want to invest for their newborn son, Noah. They decide to contribute $3,000 per year into an investment bond for kids in Australia with an average annual return of 6% after fees and before tax.

Step 1: Investment structure and tax

The investment bond is taxed internally at a maximum rate of 30% on earnings, meaning returns are reinvested within the bond. Emma and James do not need to declare these earnings on their tax return.

Step 2: Contributions and growth

They invest $3,000 per year for 10 years.

Using a compound growth formula:

Future Value = P × [(1 + r)^n – 1] / r

Where:

P = $3,000 (annual contribution)

r = 0.06 (6% annual return)

n = 10 years

Future Value = $3,000 × [(1.06)^10 – 1] / 0.06 = $39,771

After 10 years, the bond balance grows to approximately $39,771.

Step 3: Long-term growth beyond 10 years

If Emma and James continue investing for 18 years, the value could reach around $87,000 (assuming the same return and contribution).

If they withdraw after 10 years, the entire amount is tax-free, thanks to the 10-year rule. That lump sum could help fund Noah’s university fees or his first home deposit without triggering extra tax or Centrelink implications.

Tips for Successful Long-Term Investing for Children

1. Start early – Time is your greatest advantage.

2. Stay consistent – Small, regular contributions compound powerfully over time.

3. Match investment to timeframe – Higher growth assets (shares, diversified funds) suit longer timeframes.

4. Use tax-effective structures – Consider investment bonds to simplify tax and maximise compounding.

5. Review periodically – As goals or tax laws change, review the investment structure with a financial adviser.

Key Takeaways

• Investment bonds offer one of the most tax-effective, long-term investment options for children in Australia.

• Tax on children’s unearned income is high, making investment bonds a practical alternative to direct ownership.

• With consistent contributions and compounding growth, even modest investments can grow substantially over 10–20 years.

• Always seek professional advice to tailor strategies for your family’s circumstances.

Whether you’re investing for children or grandchildren in Australia, the earlier you begin, the greater the potential rewards. An investment bond can provide a flexible, low-maintenance solution to grow wealth for the next generation while keeping tax simple and outcomes clear.

At Scion Private Wealth we work with many parents and grandparents exploring investing for kids and grandchildren. Getting investment management advice is the best way to ensure you make informed decisions about tax effective structures.

Book a consultation with our investment advisor today and discover how we can help you to build financial security for your family for generations to come.

Disclaimer: This article provides general information only and does not constitute financial advice. You should seek personalised advice from a licensed financial adviser before making investment decisions.