This normally involves investing a certain amount of money each year and allowing the money to grow through savings accounts, term deposits or investments.
However, many Australian parents are likely having to forgo these contributions - too stretched by living expenses in the here and now. More than 1.3 million Australians are estimated to be suffering mortgage stress while rental rates are soaring. Inflation remains close to 8% and the cost of primary and secondary education is an increasingly large expense.
With this in mind, parents in NSW may have been excited to learn of the Kids Future Fund that the Liberal party of NSW have proposed in the lead up to Saturday’s election. This is one of the central promises of Premier Dominic Perrottet’s re-election campaign, establishing an $850 million superannuation style fund for the children of NSW. The policy though has been heavily criticised by the opposition for failing to provide support for the parents most in need of extra help cultivating their nest egg.
We’ve broken down how the proposal will work, and compared it against the alternatives.
How the fund will work
In preparation for March 25th’s election, Mr Perrottet announced the incumbent government’s plans to establish the NSW Kids Future Fund. This is a scheme to help develop a nest egg for children in New South Wales. If the Liberals win the election, from next year every child in NSW under 10 years old will have a Kids Future Fund account created, with an opening balance of $400 from the government. Parents can contribute to the fund, up to $1,000 a year, and the government will match annual contributions of up to $400. The NSW government estimates that the fund will grow to around $28,000 over 18 years if parents make the matched $400 contribution, and could reach $49,000 if they contribute $1,000 each year. This is based on an assumption of 7% returns, but the government only guarantees at least 4%. The money cannot be withdrawn until the child turns 18.
Mr Perrottet called it a “down payment to secure the future dreams of our children” that will “give generations to come the financial foundation for their entire life”.
How does the fund stack up?
At the time of writing, bookmakers have Labor at $1.20 to win the election, so it’s very possible we won’t ever see this scheme come to fruition.
Nevertheless, we’ve compared investing $400 a year into the future fund (remember that each deposit is matched) against putting this amount in a savings account or index fund.
Investing in KFF (based on the minimum 4% return)
Savings accounts (based on the 18 year average of 3.05% p.a interest, according to RBA data)
Investing in index funds (based on the lifetime average yearly return of the SDPR ASX 200 Index Fund of 5.8%)
Based on those figures, the scheme could potentially mean thousands in extra savings for your child.
So if you are able to put money aside for your child's nest egg each year, the Kids Future Fund does look like an attractive option.
Is it fair?
This proposal hasn’t gone down very well with the opposition parties. Abigail Boyd, Greens MP and Spokesperson for Treasury, called the plan a “government funded intergenerational wealth transfer,” and a “publicly-subsidised trust fund for the children of the well off.”
“I don’t know which households the Premier is talking to that have a spare thousand dollars to set aside each year to buy their children’s way into our cooked housing market, but they’re not the people who are needing help right now.” Ms Boyd said.
The Prime Minister has also weighed in, saying it would ‘reinforce inequality’ rather than address what is needed.
The basis of the criticism is that only relatively financially stable families will be able to consistently make contributions to the fund. Parents struggling with their living expenses are not likely to be able to set aside $400 a year to go into their children's fund. The majority of the money will go to the children of parents who can afford to make contributions, so the main beneficiaries will be from well off families.
There are however provisions that cater for low income families. Those who receive Family Tax Benefit A are entitled to $200 a year, regardless of their own contributions. Should these parents then make contributions, the NSW government will match them up to a further $200.
Tax Benefit A is a payment that applies to those with children who aren’t already receiving benefits. It is designed for low income parents, and there are maximum earning thresholds for who can receive it. Families with a taxable income of less than $58,108 are entitled to the full extent of the benefit, while those who earn between $58,108 and $103,368 have 20 cents deducted for each dollar they earn over the minimum.
This was the riposte of the New South Wales government when confronted with calls of inequity. Mr Perrottet estimated that there were over 300,000 of these families across NSW, which would mean over $60 million each year would go to these families, even if they didn’t contribute anything. If parents receiving Tax Benefit A made no contributions to their children's account, when the child turned 18, they would receive a payment of about $6,177 based on the minimum 4% p.a return. While this is not a sum to be sniffed it, it will likely do little to dissuade Labor and the Greens that the policy is more beneficial for wealthy families who contribute $400 each year, who can expect their children to receive over $22,000 as above.
What else parents should know
If you feel that the Kids Future Fund is unfair, or in the event that the Coalition loses the election and the proposal is consigned to history, there are still best practices to follow when it comes to growing your children’s nest egg.
Louisa Sanghera, finance and mortgage expert in the Mum CFOs Money Masterclass, has proposed several basic steps she thinks parents should take to maximise their nest egg, no matter how small the contributions they are able to make are.
Start early, so the money has more time to grow.
Set specific goals for how much you want to save.
Automate savings so the money goes into the savings account each month without thinking about it.
Minimise high interest debt.
Consider investing your savings for greater returns.
Re-evaluate your goals and savings plan regularly to keep on track to reach your objectives.
Need somewhere to store cash and earn interest? The table below features savings accounts with some of the highest interest rates on the market.
Savings Maximiser (<$100k)
Savings Maximiser (<$100k)
|No monthly fees|| |
Savings.com.au’s two cents
At the end of the day, the Kids Future Fund would simply reinforce a reality we are all familiar with. Wealthy parents can afford to invest heavily in their children, and watch that money grow over time, while those from low income families do not get the same luxury. The opposition to the scheme is based on the idea that it’s the Government's job to address these inequalities, not fortify them.
The basic concept of a fund that matches parents deposits comes from Canada’s ‘Registered Education Savings Plan’ (RESP), which helps families save for tertiary education. Canada quickly found that there were twice as many RESP accounts for high income parents than low, and has since introduced ‘learning bonds’ for children from low income families. Should the Future Fund be introduced, perhaps there will be a similar learning curve, and it may be adjusted in a similar manner. For now though, while the fund will seemingly benefit everyone at least a little, it will undoubtedly be more useful for parents who already stood a good chance at providing their children a hefty nest egg.
Picture by Lukas on Pexels