How to start building an egg for your children

July 5, 2022

How to start building an egg for your children

With ever-rising house prices, first-time buyers need a down payment of between around € 15,000 and € 50,000, depending on where they are in the state. Add to that the high cost of living – not thinking about rents – and it's obvious that many young people will struggle to make ends meet.

Then step forward, where possible, “mom and dad's bank” to help offspring get around the world.

According to Francis McTaggart, founder of Fortitude Financial Planning in Drogheda, two of the most common inquiries he receives are how to help have children on the real estate ladder and how to pay for a wedding for one or more offspring.

Nick Charalambous, CEO of Cork-based Alpha Wealth, agrees. “It's probably the most common topic I have with clients,” he says of helping to have children on the real estate ladder.

For some people, helping a child with a deposit or financing a wedding will simply be a matter of writing a check; for the rest of us, however, careful planning and savings will be required.

The good news is that by starting young, and saving a little, and often, achieving a stated goal can mean less pain than you might expect.

Building a real nest egg is possible, even with limited savings. Yes, saving € 40,000 for a home deposit in Dublin (and potentially significantly more, given the impact of inflation) will not be realistic for many. But even a small sum each month can deliver a five-digit sum.

If you start when the child is small, you will have a longer savings horizon. And given the average first-time buyer age of about 38, according to the latest data – as well as an average age to get married at 37.8 years for grooms and 35.7 years for brides – according to figures from the Central Statistics Office, you might be able to continue saving well into the child's adulthood.

Of course, it should be clear that saving for a child should come only after your own needs are met first – and there should be no pressure to do so. As McTaggart says, making such a decision to save for a child's future needs should be considered against a person's overall financial circumstances and seeking financial advice can be helpful in this regard.

“I think there is a little pressure on parents who are worried about how difficult it is to get up on the real estate ladder,” says Charalambous, adding: “I did not get the level of savings that most parents want to put away for their own. “I see customers who have credit card bills but who save religiously for their children. It does not make financial sense to do so.”

If you start saving for your children and then struggle financially, remember that you can always cut back on your savings for a while, or quit altogether, should your financial circumstances change.

The best advice is simply to start. It can be just € 25 a month, or significantly more, but at least if you start, you can add this over time. Creating a direct debit takes the decision out of your hands.

“Automate your savings and automate your investments,” says McTaggart, urging people to “pay yourself and your future self first. Don't wait until the end of the month to pay for yourself.”

Compounding has traditionally helped savers in the long run, but it has not been helpful in the low-interest rate environment of recent years. However, with rising interest rates, this may change.

With an average deposit rate of 1 percent, 50 euros a month can be turned into more than 13,000 euros over 20 years. Triple that to 3 percent and your money turns into € 16,415. As this shows, it really pays to look for the best possible deposit rate – and be prepared to change if necessary – when you save in the long run.

But expect no magic soon. Although deposit rates will start to rise as interest rates rise, this will not happen immediately.

“It will more than likely take three or four years before we see any reasonable interest rates,” says Charalambous.

Risk

But a deposit account is not your only option. By taking a little risk, you can increase your return.

As Charalambous notes, people say, “I want to keep pace with inflation, but I do not want to risk my money when it's for my children.” The reality is that you can not have it both ways. Zero risk will mean a return during inflation, which effectively reduces the value of your savings pot.

However, the risk can be reduced when you save in the long run. He suggests that people apply a five-year rule: when saving or investing for five years or longer, it is appropriate to take a certain risk.

So, for example, if your child is 16 and you are saving for college, a fund invested in stocks is not the right option. But saving from birth or young age gives a parent plenty of time to ride on the whims of the stock market.

“Parents with a newborn child should accept the risk, as they usually have 18+ years to make their money work,” he says.

In which direction are house prices going?

And you do not need a hefty sum to get started. With Zurich Life, for example, you can start saving from as little as € 75 in one of its regular savings investment funds.

Such an approach can yield significant returns. Remember to save 75 € every month for 20 years. At the end of the semester, based on an annual return of 5 percent, you will have returned approximately € 30,500. This means that you have added € 12,500 to your child's booth thanks to the investment result.

Or how about 150 €? This could yield around € 61,000 after 20 years, based on the same investment result.

Of course, the markets rise and fall, but the advantage of this approach is that your child may not need the money when the markets are down and can afford to wait until conditions improve to bring in the revenue.

In addition to Zurich Life, regular investment products are offered by Irish Life, New Ireland, Aviva and Standard Life. An advantage of such funds is also that they usually offer easy access; so you can decide to stop payments or withdraw all your money if you want.

Watch out for costs when choosing a regular savings fund: while you can not control future results, you can control how much is charged in fees and charges. Charalambous suggests that you obtain the fee structure in writing from the various suppliers – many of which are heavily sold through the broker network – and look around before making your final decision.

You should ask what the allocation rate is – “how much of your money is physically invested each month” – what the management fee is and the broker's fee. In addition, you need to consider the state fee of 1 percent.

Exchange traded funds (ETFs) can offer a cheaper alternative, given annual fees of as low as about 0.1 percent. However, they can be tricky for Irish investors because you have to calculate the tax yourself – and with regular savings, you may need to do this every month, while you will also suffer from stockbroking fees.

Another option is to buy shares. It can potentially be very lucrative – shares of Apple, for example, have risen almost sixfold in the last 10 years. But such a concentrated approach can also be risky.

“The stock can go to zero and you can lose everything,” warns McTaggart.

Tax consequences

When saving for a child, you need to keep in mind the tax aspects of doing so. If you save in your own name, when it comes to transferring the funds, it will be considered by Revenue as a “gift” and thus a potential subject to gift tax (CAT) with a tax rate of 33 percent. While a child can inherit € 335,000 tax-free from their parents, which means that no tax will probably have to be paid, it will reduce what they can get tax-free later in life or in the form of inheritance.

To avoid this, and especially if you are likely to have assets that exceed the tax-free threshold to leave for your children, you should consider adding your savings to your children directly in their name. If you do, you will be able to take advantage of the annual exemption for small gifts of € 3,000, which means that € 250 a month (€ 500 from two parents) can be saved tax-free every month.

In order to meet the revenue obligations, such savings should usually be in the name of a child. You will probably not be able to do this for stocks; For example, DeGiro stopped opening such accounts as early as 2018 due to “stricter laws and regulations for customer due diligence for people under the age of 18,” according to a spokesman for the broker.

But you can open accounts with Statens sparande as well as with the previously mentioned life companies. Such accounts are known as trust accounts and may impose penalties for early withdrawal. They will convert to the baby's name at 18 years of age.

Unsurprisingly, there are some considerations that come with this. First, if it says in the child's name, you do not have access to it if times get tough. So you have to be very sure that you can afford the funds.

Secondly, when the child is 18 years old, he will have a legal right to access the money. Many parents may whine about the possibility that a child will suddenly have access to such a significant lump sum.

McTaggart says that many parents simply do not tell their children about the money they have saved for them until the time comes when it is required. However, he thinks it is worthwhile to do so to help his adult children better understand how their finances work.

“We can seize the opportunity at 18 to educate them about the benefits,” he says.

Charalambous agrees: “We need to make sure our children understand what it is like to handle money, rather than just building money for them.”

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