Money: Saving now will help the 'nippers'

By Mary Holm
Money Matters

Q: As a proud grandparent, I would like to do something to ensure that educational funds will be available to my new grandson should he need them.

My intention is to reduce (and perhaps - wishes, dreams! - eliminate) the impact of the punitive student loan scheme, which I think we will have to assume will still be blighting people's lives in 16 years. Is it really still being charged at 8 per cent, compounding?

I have been thinking in terms of putting a lump sum - of, say, $5000 - into a managed growth fund where it can compound quietly away for 15 years or so until it is needed, but would appreciate your opinion.

Perhaps the amount is inappropriate, or there is an alternative that has not occurred to me.

I should add that my wife and I (aged in low 60s) have recently set up a family trust to which we are gifting assets as rapidly as possible, but with some way to go.

So I wonder whether we should provide the money by way of an interest-free loan (at call, for tax purposes) to the nipper, via his parents, and alter our wills so that it will be forgiven at death.

If there were further grandchildren, would it be best to repeat the process for each?

A: What a great way to help the "nipper" - and any other little siblings or cousins to come.

The student loan interest rate dropped from 8 to 7 per cent on April 1, to reflect falling market rates.

That's low for an unsecured loan. And, basically, the student tuition and loan system is probably fair. But that's another issue. It's still tough on those who don't have relatives like you to help them out.

You'll certainly have to do the same for all your grandchildren, or risk being accused of favouritism.

Keep that in mind before you settle on $5000. If you end up with a whole tribe, can you afford that much for each?

What's more, if you're really being fair, you should adjust the amount for inflation over the years.

The best place to invest the money is probably a managed fund that holds international shares. Its returns are more likely to be volatile than in a fund holding other asset types, but the returns are also likely to be higher over the long term. And, with 15-plus years to play with, that's plenty long enough.

If the $5000 grows at 5 per cent a year, it will total $10,400 in 15 years.

If it grows at 8 per cent, it will total almost $15,900.

Will that be enough? Hard to say. Student fees for arts, science, commerce and law degrees are currently around $3000 a year. But dentistry fees are more than $20,000 a year.

Who knows what they'll all be in 15 or 20 years? It depends, largely, on how much the Government subsidises them. In any case, your contribution will make a big hole in the fees, even if it doesn't cover them.

In considering your gift duty situation, Bell Gully partner Richard Taylor says your loan idea should work.

The child's parents could sign an acknowledgment of debt on behalf of the child. And you could, as you suggest, alter your wills to forgive the amount if it is still owing when you die.

But Taylor is concerned that your charming grandson may grow up with no interest in education. At 20, he might blow the money on who knows what, and you couldn't do a thing to stop him.

He thinks your best course of action is to make use of the family trust you have already set up.

Your grandchild, and any more to come, are likely to be discretionary beneficiaries, he says. And if they're not, you may be able to add them.

You can write a "memorandum of wishes" to the trustees - or amend a current memorandum - saying a proportion of the trust funds is to be spent on the grandchildren's education.

These memorandums (or "memoranda" if you must show off your Latin education) aren't legally binding. But, says Taylor, "most trustees are loath not to follow them without good reason".

The trust could allocate income to the grandchildren, so it is taxed at their lower tax rates.

If you follow this suggestion, you would add the education money to the assets you're gradually gifting to the trust.

Alternatively, you could set up a formal education trust for all your grandchildren. Then you could be certain the money would go where you wish.

And, with such a trust, you would probably qualify for a gift duty exemption. There's no duty payable on gifts for the education of a relative that are not excessive.

On the downside, while such a trust could be quite simple, "there's a query as to whether it would be fully justified, given the amounts we're talking about. There are some costs in setting it up and administering it," says Taylor.

Also - because the income earned over the period must be retained by the trustees for educational purposes, rather than allocated to the grandchildren - that income would probably be taxed at 33 per cent rather than the young ones' lower rates.

All in all, Taylor likes the idea of using your existing family trust better.

Q: I have just finished reading your article regarding Bonus Bonds in last weekend's Herald. I have a few questions:

1. Are the monthly results published? If so, where?

2. Are winners of prizes notified by mail?

3. I have never won a prize that I am aware of - my bonds were given to me in August 1974. Do they keep prizes until claimed?

4. Having moved a number of times over the last few years - who do I send my current address to, to ensure I'm still on the books?

A:. This is like a treasure hunt. The prizes are kept "for time immemorial", as the ANZ's Samantha Shaw puts it. So there's a pretty good chance you'll strike at least a little treasure.

The Bonus Bond results are announced on the second Tuesday of each month, and the major prize winning numbers are published in ads in all the big daily newspapers the morning after. In the NZ Herald, the ad is usually in section A or B.

Just this past Wednesday, for example, the Herald ad listed the bond numbers that won $300,000, $100,000 and $50,000, and 120 numbers that won $5000 each.

It doesn't, however, list the more than 200,000 bond numbers that won prizes ranging from $1000 to $20.

The complete list is available at any ANZ branch or Post Shop, from the Friday 10 days after the Tuesday announcement.

If you win, you are also notified by mail at the last address you gave the Bonus Bond Centre. When you move, you should tell them, at Freepost 137, PO Box 898, Dunedin. To ask if you have any unclaimed prizes, either write to the centre or ring 0800 804 600.

The likelihood that you've won a prize without knowing depends partly on how you asked to receive any prizes when you bought the Bonus Bonds. There are three ways:

\EE By cheque. If you've moved, the cheque might never have reached you, and ANZ will know you haven't cashed it.

\EE By transfer into a bank account. It's possible that you received a smaller prize and didn't realise where the money had come from. But if you closed the account after you bought the bonds but before you won a prize, the prize may be unclaimed.

\EE By reinvestment into more Bonus Bonds. Certificates for these are mailed to you, but you might not have received them. It's possible, too, that the prize bonds have, themselves, since won prizes.

The Bonus Bonds Centre says there are many unclaimed prizes that it would like to deliver.

Do let me know, anyone, if you discover that you won a large prize some time ago.

* Got a question about money? Send it to Money Matters, Business Herald, PO Box 32, Auckland; fax: (09) 480-2054; or e-mail: maryh@journalist.com. Letters should not exceed 200 words.

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