Friday 25 September 2009

Children's Superannuation: Retirement Savings Account (RSA) Comparison - AMP vs CommBank

I opened two retirement savings accounts for DS1 several years ago, one when he was born, and the the second when he started earning money doing a paper round.

The first retirement account was a 'Child Super' account that allowed parents or grandparents to contribute up to $1,000 each year into a superannuation account for their child. These accounts were never very popular as there was no tax deduction for the amounts contributed, so the only real benefit of a 'Child Super' account is to avoid the incredibly high tax rates (around 60%) applied to children's unearned income (eg. interest on bank savings accounts where the money came from gifts or pocket money) once it exceeded a threshold (of around $2,000 pa after applying the low income tax rebate). Earning within a 'Child Super' account are taxed at the usual concessional superannuation tax rate of 15%. I opened the 'Child Super' account with Macquarie, and at least it offers a good choice of investment options (eg. Australian and Overseas share funds). Once DS1 reaches 18 years of age this account will transition to a normal "personal" superannuation account (I may add him as a member of our SMSF when he turns 18. Under 18 it's harder for children to be members of SMSFs as they can't be a Trustee).

Once DS1 started having 'earned income' (from his paper round - deposited into a separate savings account to keep it separate from his pocket money and any money gifts) I opened a second "personal" superannuation account for him, so he could benefit from the 1.5:1 government co-contribution on personal, undeducted superannuation contributions (ie. when he deposited $1000 into super each year he received a $1,500 "co-contribution" from the ATO). Finding a suitable superannuation account was a bit difficult - Child Super' accounts aren't eligible for the co-contribution (as they don't accept contributions from the child themselves), and most "personal" superannuation accounts required the applicant to be over 18 years of age. At the time, the only account I could find for DS1 that didn't require applicants to be over 18 years old was the AMP Retirement Savings Account (RSA) (at the time they didn't require DOB information on the application form, although they later did apply an incorrect "default" DOB and I had to send in a copy of his birth certificate to get the data fixed). This worked well, with DS1 received the co-contribution "match" for FY04/05 and FY05/06 (that year the budget even gave a second "bonus" co-contribution of $1,500). DS1 didn't receive the co-contribution for FY 06/07 (once he had stopped his paper round), as the Superannuation co-contribution rules at that time required having income from an employer to be eligible (ie. the rules excluded the self-employed). The rules were change the following year so that any income earner (including self-employed) under the age of 75 who makes an undeducted superannuation contribution is now entitled to receive the co-contribution (although it's been reduced to $1,000 this financial year). DS1 received the $1500 co-contribution in DEc 08 for the FY07/08 tax return he lodged in July 08, and I expect he'll receive the $1,000 co-contribution for FY08/09 later this year...

However, since I opened his AMP RSA account interest rates have dropped considerably, and the rates on offer from the AMP are now very low:

Balance________________ Int Rate
<$1,000________________ 0.00%
$1,000 - $2,500________ 0.15%
$2,500 - $10,000_______ 1.15%
$10,000 - $50,000______ 1.40%
>$50,000_______________ 1.60%

The 0% rate is obviously set to allow for the Superannuation rules that prohibit charging any fees on Superannuation account balances below $1,000, and all the rates are net of MER (estimated at 1.9%).

I recently received a PDS (Product Disclosure Statement) for a new RSA on offer from Commonwealth Bank. It looks pretty good for anyone looking to setup a superannuation for a child or teen wanting to save something towards their retirement (and possibly get help from the government co-contribution, although the next Labor government budget may change that). There is a flat annual admin fee of $25, but only when the account balance is over $1,000. And the interest rates on offer are much better than the AMP rates, especially for balances under $2,500:

Commbank RSA:
Balance________________ Int Rate
<$1,000________________ 1.90%
$1,000 - $5,000________ 2.00%
$5,000 - $10,000_______ 2.15%
$10,000 - $50,000______ 2.30%
>$50,000_______________ 2.60%

On DS1's current RSA balance of around $12,000 he would earn an extra $83pa in interest with the Commbank RSA.

The Commbank RSA also offers a second investment option within the RSA account - fixed rate term deposits for amounts over $5,000:

Commbank RSA term deposits (min $5,000):
Term___________________ Int Rate
1 year_________________ 2.40%
2 years________________ 3.40%
3 years________________ 4.50%
4 years________________ 4.95%
5 years________________ 5.20%

Although variable interest rates are likely to start rising in 2010, and may go up considerably if inflation takes hold post-GFC, the term deposit rates look attractive for a government-guaranteed investment sitting in a low-tax (15%) environment.

As the minimum amount to open a CommBank RSA is just $1, I'm going to open an account for DS1 in preparation for rolling over his AMP RSA account as soon as this year's co-contribution has been processed.

This graph highlights the difference in net interest rate on offer from AMP and CommBank:

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High Interest Savings Account said...

Well said... the money that would be saved in your account would continue to earn interest for you and would also be tax-deferred. The only tax that you will have to pay is on the money that you may withdraw from your plan later on as your regular income.

Anonymous said...

What benefits would there be adding DS to you SMSF? How would you differentiate his funds to yours given his will be preserved for another 40 years over yours. said...

The benefits for DS would be the same as for DW and myself - lower admin costs within the SMSF than he pays currently in the retail superannuation funds. As the SMSF fund administrator (eSuperfund) charges a flat fee, adding him will actual cost $0 in extra admin fees, so all the fees he currently pays the retail fund administrators will be saved.

His funds will be 'pooled' within the SMSF in terms of asset allocations (ie. all three trustees will decide on where the SMSF funds are invested), but his share of the total SMSF fund will be tracked by the SMSF fund administrator, as is currently the case for DW and myself. That is, we each get an annual 'member statement' telling us our personal account valuation.

Anonymous said...

I am tempted with the SMSF but unsure if it is worth the hassle with only $100k balance.

Have you considered first state super for your kids accounts, they allow accounts to be opened in the name of the child withthe childs tax file number, the fees are very low only $52 per year.

Thanks said...

I'll have a look into the FirstStateSuper for DS1, as the AMP RSA offers very low interest rates these days, and it will be another 6 years before he can join our SMSF.

The SMSF fees mean it won't save you money compared to some of the low-cost funds available when the total SMSF balance is only $100K. So, unless you want to be very 'hands on' (e.g. picking and investing in individual stocks) it wouldn't be worthwhile.

Anonymous said...

I am assuming DS1 and 2 are oz citizens have you considered the Kiwisaver account from NZ? Cash bonus of $1000 from the NZ government, there doesnt seem to be any restrictions for kids or australians said...

The Kiwisaver website says you have to be eligible to live in NZ indefinitely (so DS1 and DS2 being Oz citizens would qualify) AND live or normally live in NZ (which rules out DS1 and DS2 since we live in Australia)...

It also specifically states that you can't join Kiwisaver if you are living overseas (ie. not in NZ).

So, this would be an option for NZ readers but not relevant to Australian residents.

Anonymous said...

Hi Ralph

How are your DS's retirement savings accounts going? Did you ever manage to invest into a growth fund or do you still use the cash fund.

Thanks said...

DS1 still has two super accounts - an AMP RSA earning fixed interest, and a Macquarie superannuation account invested in growth assets. DS2 has one super account with INGOneAnswer which is invested in growth assets.

I haven't bothered moving DS1's RSA balance yet, but may transfer it to his Macquarie account and close hise RSA account, as the rules on super co-contributions seem to rule our students even if they earn some money and make an undeducted contribution into their super. Also, the co-contribution has been scaled back so much it is hardly worth doing if the contributions go into a low-interest RSA.

As DS1 will move his super into our SMSF in 5 years time, the impact of a relatively low fixed-interest rate on part of his super balance won't have much impact on his final balance in retirement.